Let’s Bust some Money Myths

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.

No change in Cash Rates

Following its monthly board meeting, the Reserve Bank of Australia (RBA) announced that it has held the official cash rate at 1.5 per cent. All 31 economists surveyed predicted the RBA’s verdict, citing uncertainty in domestic and foreign markets. Over 90 per cent of brokers surveyed also predicted a rate hold.
Prior to the RBA’s announcement, economist at Corinna Economic Advisory Saul Eslake noted that while economic growth is “above trend”, weaker than expected labour market and inflation indicators would dissuade the central bank from lifting the cash rate.
“[The] RBA has made it increasingly clear that it is in no hurry to start raising rates,” Mr Eslake said.
“Although economic growth is now running ‘above trend’, unemployment and underemployment are still higher than the RBA wants, and inflation is lower than the RBA wants, and it expects progress on both of these fronts to be only ‘gradual’.”
Mr Eslake also claimed that the RBA “seems unconcerned” by out-of-cycle rate increases from lenders, including three of the big four banks.
The US’ new wave of tariffs on Chinese imports, and the effect that rising funding costs may have on Australian mortgage rates, could also have an influence on the RBA’s economic forecasts.
“On an international level, [President Trump’s] trade tariffs on Chinese imports may create a drag on global growth, which may impact on the Australian economy and jobs,” the spokesperson said.
Further, despite also predicting a rate hold, senior economist at AMP Capital Shane Oliver warned: “While economic growth ran above trend over the year to the June quarter and growth should be supported by business investment, infrastructure spending and exports going forward, uncertainty remains around the outlook for consumer spending, house prices are likely to fall further and wages growth and inflation remain low.”
1300HomeLoan managing director John Kolenda also made reference to the continued uncertainty brought about by the financial services royal commission, stating that the RBA should “help navigate” the economy “through these uncertain times”.
He added: “The royal commission is still a factor and we have other elements such as the US-China trade war, downward pressure on the property market and the federal election looming which all influence consumer confidence in a negative way, troubling our economic conditions.
“Lenders have already raised their rates out-of-cycle. If the RBA followed suit that would only be detrimental to consumer confidence in a falling housing market.”

How to escape mortgage stress

Understanding your borrowing capacity

First of all, it’s important to understand how much you can realistically afford to borrow for a home loan. Consider Reviewing your income, expenses, other financial commitments, potential loan details and number of dependents to get an understanding of how much you can afford to borrow.

Remember, what you can save for a deposit will play a huge part in determining the amount you can borrow. For some full -documentation loans, the loan to-value ratio (LVR) is around 80%, which means you need to come up with the remaining 20% in the form of a down payment. Other home loan products allowing greater than 80% LVR tend to come with higher interest rates or fees. On top of this, it’s important to fully understand the costs involved in taking out a mortgage and owning a property. Some major expenses include stamp duty, mortgage insurance (which is generally payable if you need to borrow more than 80% of your property value), establishment fees, ongoing repayments, any loan fees and repairs/maintenance. You can use online calculators to get a feel for how much you can afford to borrow.

Knowing your potential borrowing capacity can help to ensure that you borrow within your means, which means you’ll be in a much better position to service your ongoing mortgage repayments and the other associated expenses.

Factor in 2-3% on top of your current repayments

Once you’ve taken out your home loan, it’s important to draw up a budget and consider a buffer of at least 2-

3% on top of your existing repayments to account for interest rate rises. While the cash rate is at a low of 1.5%, it’s expected to rise as early as next year so it’s important that variable rate mortgage holders incorporate a potential rate rise into their budgeting.

Anticipating interest rate rises and planning ahead may help you avoid mortgage stress as it could help with coping with higher interest rates and the more expensive repayments that come with this.

Re-think your existing debt

Your mortgage is arguably the biggest financial commitment you’ll make in your lifetime and it’s a debt you’ll be managing for up to 30 years. This could mean making some adjustments to your other personal finances to free up your cash flow and to reduce mortgage stress. For instance, if you have multiple credit cards, you may want to consider moving your plastic debt onto a single card via a credit card with a 0% interest balance transfer promotion. If you repay the debt during the interest-free promotional period, you’ll dramatically reduce your interest costs. However, just be mindful of the revert rate that will apply once the promotional period ends.

Consider refinancing your mortgage

If you don’t think you’re getting the best bang for your buck on your mortgage, then think about switching. Refinancing to a lender that offers an interest rate that’s even 0.25% lower than what you’re currently paying could mean thousands of dollars in savings over the life of your mortgage.

However, an interest rate is not everything in a home loan and it’s important to be mindful of the establishment costs and ongoing fees associated with a new home loan.

Ask your bank for assistance

If none of the above options is possible and you’re experiencing mortgage stress, ask your bank for support. You can apply for Hardship Assistance –which may involve a temporary change to your loan obligations to give you a chance to get back on your feet financially. Your bank will assess your circumstances and if it’s appropriate, may be able to help by, for example, providing a temporary reduction or deferral of your repayments.

In Summary

Repaying a mortgage is an enormous financial commitment that can cause some households a world of stress, so to ensure it doesn’t interfere with your livelihood, consider the above tactics to remain in control of your mortgage debt. A little financial discipline can go a long way to ensure that you’re in a sound position to manage your repayments and to eventually achieve full home ownership.

Bessie Hassan/Finder.com.au