Harvesting Financial Success
Spring is the perfect time to rejuvenate your financial habits as well as your garden! Here are 5 ways to set you, and your garden, up for success: 1. Plan your garden: Start with deciding what type of garden you want. In other words, get clear about what goals you want to achieve and by when. Once you have your list of goals prioritise them, so you know where to focus your efforts. Tip: If a goal is large and will take some time to achieve, set yourself some smaller goals with shorter timeframes along the way. 2. Pull out the weeds: You don’t see garden designers on TV rushing in to plant a new garden without getting rid of the weeds first. In financial terms this is the same as eliminating bad debt. Bad debt is debt used to purchase things that don’t go up in value, like cars and household goods. Financing purchases with credit card debt (where the entire balance isn’t paid off each month), personal loans and perhaps ‘buy now, pay later’ facilities mean paying very high interest rates or late fees. Your total cost ends up much more than the original purchase price. These are your weeds – pull them out and don’t let them take hold again! 3. Prepare the soil: A key element to a flourishing garden is good soil. For us this is managing our cashflow. For many people our income is fairly consistent, so the focus is on managing outflows. Think of this as a spending plan not a budget. The ‘B’ word has a strong association with denial and, much like a diet, too much restriction can be counter-productive. Be honest when completing it as you need to know exactly where your cash is going. Your adviser can be a huge help with this. It’s an opportunity to look at your spending and think again about your goals. Is the enjoyment you get from three streaming services more than what you’ll get from achieving your goal? What do you want more? Tip: Ways to reduce spending often require some planning. Taking lunch to work can save a heap of money. Too rushed to do it in the morning? Make something the night before – and remember to take it with you the next day! 4. Plant your garden: This is where things start to take shape! Gardens often start small so think of this as your initial investment which over time becomes larger and larger. In your financial life this is the power of compounding. To help those initial plants fill out your garden quicker you can add other small plants over time. This is known as dollar cost averaging or adding regularly to your initial investment to boost the effect of compounding. 5. Protect from pests: Your garden will appreciate some help to guard against pests and disease. In the same way it’s a good idea for you to protect your biggest asset – your ability to earn income. Income protection and other types of life insurance can protect you against unexpected events and prevent all the hard work you’ve put into your financial garden from unravelling. Success requires commitment because, just like droughts which affect your garden, there will be times when reaching your goal seems hard going. Don’t abandon your dreams! With clear goals, elimination of bad debt, a realistic cashflow plan, disciplined regular saving and protection of your biggest asset, you’ll be harvesting rewards season after season! The information provided in this article is general in nature only and does not constitute personal financial advice.
Are we jeopardising the bank of Mum & Dad?
The temptation is obvious. Soaring house prices have made buying a home tough for most home buyers and prompted many parents to think they should step in and make a financial contribution. The typical argument is that Mum and Dad don’t really need the money and that their children will inherit it one day anyway so it might as well be now when it can do some real good. As a result of this thinking, the Bank of Mum and Dad is now estimated to be one of the top 10 mortgage lenders in the country, as more and more people turn to their parents for financial help when buying a home. According to Digital Finance Analytics, parents are now contributing $90,000 on average towards the first home deposit of each of their adult children, up 20 per cent in the past twelve months. With the median house price in Australia’s combined capital cities now $896,000, parents contribute just over 10 per cent as a deposit, or if two sets of parents are involved, 20 per cent as a deposit. For most parents, this is a large amount of money, which can be given to their children either as a straight-out gift or as a formal loan or so-called ‘soft’ loan. Typically, this is done by drawing down against the value of their home as security and gifting the funds or providing a guarantee for their child to buy a home using their home as collateral. The financial comparison site, Finder, estimates that 60 per cent of all first-home buyers access funds from their parents to buy their first home. More, it found that 50 per cent of these children were facing some level of financial stress before deciding to buy a property with the help of their parents. While gaining financial support from Mum and Dad might be essential for many Australians to take that first step onto the home ownership ladder, is it a good decision for Mum and Dad? While some parents can afford this financial handout, it is only the case for some. Figures from the Association of Superannuation Funds of Australia show 1.68 million, or more than half of all Australians over 70, have no super. Of those older Australians who do have super, the median value is between $100,000 and $149,000, suggesting few in this age bracket have funds they can afford to give away. ASFA estimates only 185,000 Australians have $500,000 or more in super, and about 27,325 individuals have more than $2 million in super – a figure where giving funds to children might be affordable. These figures change considerably for Australians in the 50–70 age bracket as these younger Australians have had access to super for longer. However, it’s clear that the Bank of Mum and Dad is not as flush with funds as suspected, and many are sowing the seeds of their own financial destruction. While it is simple in the first flush of retirement to think there is more than enough to support Mum and Dad for as long as they live, life events might undermine this. No one knows how long they will live or what medical issues they may face through retirement, which could mean they themselves need every cent they have. Throw in the prospect of one or both parents needing to move into a nursing home at some stage, which can be a significant cost of around $500,000 per parent; then their finances start looking very shaky. The real fear is that in trying to help their children buy a home, all the Bank of Mum and Dad is really doing is pushing up house prices and sowing the seeds of their own financial problems. The information provided in this article is general in nature only and does not constitute personal financial advice.
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