Making the most of your money often requires common sense more than a commerce degree.
Let’s take a look at five misconceptions about money that could be holding you back from greater financial freedom.
1) I DON’T EARN ENOUGH TO SAVE
A lack of savings generally has less to do with how much you earn and more to do with how much you spend. Cutting out even small discretionary spends can reap big rewards.
Take-away coffee every day at work – around $820 per year.
Buying lunch three days a week – more than $1,000 a year.
Tuckshop once a week for the kids – more than $250 a year
Often we don’t save because we think we need to sock away $50 or $100 at a time – and then give up when we discover we don’t have that much left over.
But you can start smaller – much smaller. If you saved $1 a day from age 18 to 65, with compound interest paid at six per cent, you would eventually haul around $96,000. Five dollars a day would eventually turn into close to $480,000.
Compound interest is where interest is paid on the interest already earned. This powerful concept – and patience – is the key to accumulating savings over time.
2) A SALE IS A CHANCE TO SAVE
A sale is actually a chance to shop, and probably spend either more than you intend or more than you can afford.
Of course you will spend less on an item if you wait for it to go on sale. The problem is many of us discard our shopping list or exceed our budget when faced with a bargain. We focus on how much we could save, not how much we are about to spend.
One way to take advantage of a sale without being distracted by impulse buys is to shop online where it’s easier to look for the best price, make a bee-line for your item and bypass the temptation of other mark-downs.
Or if you are hitting the stores, make sure you keep focused on what it is you are looking for and try not to get distracted.
3) MY HOME WILL FINANCE MY RETIREMENT
If you live in a multi-million dollar home then you might be right.
Many of us, however, could be struggling to even pay off our homes by retirement.
There is a growing concern among financial experts that many baby boomers will be looking to their superannuation to pay off their mortgages, unlike previous generations who aimed to be without debt by the time they tossed in the work towel.
Instead of paying off the family home, many Australians have been dipping into their home equity to fund their lifestyles, with a view to using their super lump sums to clear the debt.
That strategy is likely to push more seniors onto the age pension earlier. At a maximum of about $32,000 per year for a couple, today’s pension falls well short of the estimated $56,000 spend per year for a couple’s comfortable retirement, according to the Association of Superannuation Funds of Australia.
Fast-forward 20 years and that gap is only likely to widen due to the number of retirees outstripping tax-paying workers to fund the social security system.
Even if you do pay off your home ahead of retirement and then downsize, the sale proceeds will probably not be adequate to keep you in the style to which you are accustomed.
Generally, you need about 60 to 70 per cent of your pre-retirement annual income for a comfortable lifestyle.
The best way to prepare for retirement is to sock more into super and establish some long-term investments, such as additional property or blue-chip shares. Speak with a financial advisor about the best strategies for your circumstances.
4) MY BANK WOULD ONLY EVER GIVE ME A CARD LIMIT I CAN AFFORD
When lenders assess how much credit card debt you can handle, they really are stretching things to the limit. They’re not considering your real-life financial responsibilities and discretionary spending.
And they are counting on you covering just the minimum repayment each month, so you take as long as possible to clear the debt and pay as much interest as possible.
Regardless of what a lender says you can afford, you need to do the sums yourself. Take out a smaller limit than what’s on offer and make sure you pay off your card each month.
If unable to clear the balance each month, always make higher payments than the minimum to pay the debt off as quickly as possible.
If you are already at your limit, look to switch the balance to a low-interest card. The key is to cancel your old card once the balance is transferred and to keep making repayments at the same previous rate, so you clear the debt quicker. You can also take advantage of low-interest introductory offers for a short period to really get ahead of the debt curve.
5) I’M BETTER OFF RENTING AND PUTTING MY MONEY INTO SHARES
With house prices climbing beyond the grasp of many first-time buyers, it’s not surprising some are tempted to give up their pursuit of property to invest in shares.
Financially, there may not be anything wrong with that strategy. Property and the share market are both long-term investments averaging similar capital growth over 10 years, with fluctuations along the way.
One advantage of home ownership, however, is that paying down a mortgage becomes a form of forced savings, with your property growing in value over the long term during those years.
If renting, you need to be fairly disciplined to regularly invest a portion of your disposable income. This is where the best intentions can unravel and why, over the long term, home ownership might be the best investment.
If things remain the same as they are today, there is no capital gains tax on your owner-occupied home when you later decide to sell.
Everyone’s circumstances are different so make sure you get expert financial advice before deciding on which investments are best for you.
Tax information: the information contained in this article does not constitute advice. As taxation legislation is complex, we recommend you speak with your financial advisor, tax advisor or contact the ATO for further details and expert advice in relation to your personal circumstances.