For most people, they their money goes towards four things; home, car, kids and retirement. Let’s take a look at these, and also a few rules to help you on your way.
1. HOME
What size home do you need? Or do you want? Most people have some idea, but is there a rule to follow?
Here are two sound rules you can follow:
a. Your home should cost no more than 4-5 times your gross family income.
b. Your mortgage payment should be 35% of your take home pay (max).
The old notion of buying the biggest house you can afford no longer holds water. Although interest rates are at historical lows, are you actually putting yourself at risk should interests rates rise. Do yourself a favour and “stress test” your mortgage – work out your repayments based on an interest rate 3% higher than what you would expect to pay now.
Are you looking to have kids? Work out how you will make repayments on debt should one partner not be working. Borrowing the most you can when you are a double income household could be trap in the future, if you need to drop down to one income.
Lastly, forget interest only home loans. Banks have been ordered to crack down on these loans, and as a home owner you are not going anywhere by paying just the interest on your loan. Banks will now charge higher interest rates for interest only loans, as opposed to principal & interest loans.
2. CAR
Cars… the old money pit!
Cars are a big expense; even more so if your household has two. Most people need a car… some people could consider having no car, for example city dwellers. Over here in Perth, everyone needs a car! We are so spread out, and public transport is, well….lacking.
I guess one thing you can consider is, do you need two cars? Especially if you catch public transport to work. Worth a thought.
A simple rule to stop your car eating up your income: Your car should cost no more than 3 months pay (gross). Eg. $100k income = $25k car.
Remember depreciation is going to be a killer with pretty much any car. Next time your think you need a car, “with all the fruit” think about what it will be worth in a few years. Do you like torching hundred dollar notes?
3. KIDS
I have been told kids are expensive. I am expecting my first in a matter of months…. So its been on my mind.
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.
Choosing to become a parent is a big financial commitment and there is no ‘one size fits all’ rule. The point is kids cost money, so be prepared with these figures as your guide.
4. RETIREMENT
One of our greatest challenges is to pay 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.
According to the ASFA Retirement Standard a ‘comfortable’ lifestyle in retirement for a couple is of just under $60,000 a year ($59,971) for a couple (or $43,665 a year for a single person). A modest lifestyle is considered $34,855 a year for a couple (or $24,250 a year for a single person).
The ASFA Retirement Standard considers, a comfortable lifestyle as one which enables “an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health i
nsurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”
Lucky the government makes your employer contribute to Super on your behalf, because for most people the thought of retirement is too far away.
Regardless you can consider doing a few things;
1. Sort out your Super and make sure you know where all your money is. You can setup, or login into your MyGov account to locate any missing funds and consolidate them online.
2. Look at the fees on your Super account. My rule of thumb would be fees should be around 1% if the account balance.
3. Review how your money is invested. The biggest driver of returns for most people will be how much exposure to growth assets your Super will have over your working life. If you are younger, consider growth portfolios.
4. Calculate how much Super you will have at retirement and how long this will last, based on your selected lifestyle. This will help you see if you need to contribute more to Super.
Let me know if have any questions, or if I can help.