HOW TO STRUCTURE YOUR FINANCES ONCE YOU BUY YOUR FIRST HOME
Transcript:
Getting into your first home is a massive milestone. It really is. It’s one of the biggest transactions you’ll ever do in your lifetime. It’s such a massive process, and quite often, it’s very stressful.
Sometimes the rest of your finances just take a backseat, and they get forgotten about. When I say forgotten about, I mean forgotten about for the rest of your life, until you’re about 50 or 55. You’ll realize you’ve left it a bit too late to save for your retirement. What that means is, most first homebuyers around 30 years old, if you take the maximum amount of time to pay your home loan off, it becomes a 30-year loan, which means you’re going to be around the age of 60 by the time you pay your home loan off.
So you’re in a situation where it’s actually probably going to take longer, because throughout the repayment of the loan, you might draw back on some of the equity again. You might want to draw back on equity, buy some cars, or you’ve just got costs of putting kids through school or raising a family and that sort of stuff.
So quite often the maximum 30-year loan term can turn into 40-50 years of forever being in debt. Now obviously, that’s what you want to avoid because in the long term, that’s not good.
So today, what we’re going to do is just have a look at some basic ways in which you can structure up your finances to make sure that you achieve everything you need to achieve in life. This is not about getting super rich or anything like that. It’s about just having rock solid finances, which by the way, genuinely, if you want to become wealthy, you want to have some rock solid finances anyway. Let’s get into it.
Hello, and welcome to the First Home Owner Concierge Podcast, where our sole target is to get you into your first home. Now, onto today’s topic!
Managing Your Personal Finances
So, generally when it comes to structuring up your finances (and when I say structuring up, it just means organizing your finances), the best way to look at your finances is in terms of “what do you want to achieve?”
The easiest way you can look at this for most millennials is to say, well, “I want to retire with enough investments that will make me an income so that I can live out my retirement without having to rely on a government pension”.
So that’s pretty basic, it doesn’t mean you’re going to be super wealthy, it just gives you something to aim for. You could tweak that up if you want to be wealthier. But for the purpose of this exercise, I’m just going to do what most people should be aiming for in my opinion.
What does it take to actually achieve that? Because if you’re 30 for example (let’s just use the example of someone who’s 30 years old), if you’re 30, you’ve got basically 30 years if you want to retire by 60 or 65 (the general retirement age these days). You’ve got 35 years to figure all this out. You’ve got to have a family, if that’s what you want to do. You’ve got to take care of all the other things that you want to experience in your life as well, as well as pay off your debt and live a good life.
It seems like a massive challenge when you think about it because you think of buying a property of $700,000 – $800,000. Putting kids through school costs a lot of money these days. Doing anything cost a lot of money these days… and if you think about it, it can quickly become overwhelming.
But that is the point of this exercise. It’s not the fact that things are overwhelming. Yes, these are large goals. They are overwhelming. But if you just forget about them, they don’t go away. The repercussions of not getting to that goal doesn’t go away, it just means you’ll get the alternative which is living off a government pension, which is pretty much as close as poverty is what you can get in today’s situation.
When you’re looking at trying to achieve a big goal or a big outcome, the easiest way to do that is to chunk it down and put it into sections.
- Protect yourself right now, as well as into the future.
- Budgeting.
- Paying off your home loan early.
- Create enough income for your retirement.
Before I get into those four things, I just want to jump on one little word. This is not financial advice. I’m not a financial advisor. That’s not what I’m licensed to do. Having said that, I do a 15 years’ worth of experience in finance.
1. Protect yourself.
Most people are not appropriately insured for insurances like income protection, TPD (Total and Permanent Disability), or life insurance or anything like that. This is a big problem because if you try and think like someone who’s already wealthy, wealthy people want to protect their wealth first rather than go out and make money, because there’s no point in going out and creating wealth if you’re not protected, and you just go out and lose it.
So protecting yourself is the first thing that everyone misses. The most basic one is income protection. If something happens to you for more than a year or so and you can’t work or your ability to work is affected, that’s potentially going to affect your income.
Obviously, that’s where income protection comes in because if you’ve got a 30-year loan, how are you going to pay that loan off if your ability to work is decreased? So, income protection is a massive thing.
For most people, the easiest way to look in this is to do a basic little exercise. If you’re 30 years old, and you want to retire at 65, you’ve got 35 years of working left. If you earn $100,000 a year, your insurable amount is 35 years times $100,000, which is 3.5 million. That’s an asset I would want to protect. Pretty simple.
The other situation, in terms of protecting yourself is life insurance, especially if you’re a family and you’ve got one major breadwinner. Obviously, if that major breadwinner passes away, life is going to become very hard for the remaining parent and kids to survive.
Protecting yourself is not just about protecting yourself now but it’s protecting yourself into the future… and that is the first thing people fail to get. They don’t even think about “how do I shore up my asset now, which is my ability to make income?”
2. Budgeting
I know what you’re thinking, “wake me up when you’re done”. I’m not going to go into any boring stuff, because I hate budgeting as well. But you don’t need to spend much time on budgeting.
People think that this is a really hard task. But really, it’s probably 30 minutes to an hour every six months. It’s probably more than what you need to do in my opinion.
Now, you can go hardcore on that, some people do. Good on you if you can do that and you’ve got the discipline to keep that up. But really, most people only need an hour every six months.
One of the purposes of budgeting is very important, and that is so that you know where your money goes. Because of how our economy works today in all of the transactions we make, it’s actually really hard to keep up with where your money’s going out, and that is incredibly important because the more money that’s going out that shouldn’t be going out means the less that can be going on to the home loan.
I can tell you from basically looking at clients’ statements for the last 15 years that most people would have at least $100 a week that is going out that they could be easily saving without any effort, and there are a lot of people that has a lot more than $100 a week. That’s all I want to say on budgeting. Again, I’m not going to bore you on it.
3. Pay off your home loan faster.
The secret here is to start. Generally, what happens is that when you first get your home loan, you basically tick a box for monthly or fortnightly payments.
Fortnightly repayments can often be better. Beyond that, most people don’t do very much.
I did an exercise a couple of weeks ago on what the difference would be if you (this exercise was if you refinance your home loan) paid that back down with a lot and pay an extra $100 a week. It was around $500,000 home loan and in the case study, they ended up having $280,000 from something like that.
The only reason I throw that figure out is for you to understand how much of a difference it actually makes. What you need to do is start. So a lot of people that start will go up either “that’s not important” or “we can’t afford anything else to pay on the loan”. That’s pretty ridiculous. You can afford $10 a week.
So when I say the secret here is to start you just got to put something every week extra into the home loan above the minimum and the whole idea there is to every six months or a year, you just need to review how much you’re putting in and up it.
So, even if you’re opening it, upping it by an extra $10 and that’s all you can afford to do, that’s better than nothing. Believe me, by the time it comes to the end of your loan, you will actually get a surprisingly large amount ahead with that extra $10 a week that you’re putting in.
Obviously, throughout time, if you’re increasing the amount you put in, firstly, you’re dealing with it in terms of the rest of your living expenses. You’re not really noticing it like if you put an extra $100 in a week, you’re probably not going to notice it.
But then again, if you go again in six months, and then you put an extra $50 bucks a week and after a while, you’re not going to notice it either.
So that’s the beauty of it every six months, so you can just keep putting more in, and eventually you won’t notice that you’re putting so much into your loan amount.
Whereas at a start, for example, I think I put an extra $250 a week aside, at the start, I would have said well, an extra $50 a week is a lot when I first took out my loan, I think that was similar to what the repayments were. But over time, what happens is you just deal with it, either your income goes up or whatever. But over time, you’re paying your home loan off. Sometimes it’s over 10 years quicker, depending on how quick you can pay off.
So I just want to explain that if you pay your loan off 10 years quicker, and you’re paying $500 a week onto your home loan as your home loan repayments, over the next 10 years you can basically put $500 a week towards your retirement. So $500 x 52 = $26,000 x 10 years is $260,000.
So that $260,000 obviously is now going into your super or some sort of investment if you’re saving for retirement. That’s also compounding. So that $260,000 is actually a lot higher by the time you get to the end of that 10 years. So what I want to say about that is this is the goal, this is where it’s at.
This is a great trick banks play on the individual or on the borrower, and that is to keep them in debt for the longest amount of time possible because that means they’re making the most amount of interest, and that’s where they make profit.
So your goal is to pay the home loan off as soon as possible. It’s not rocket science. People just don’t understand it in terms of long periods of times. It’s 2022 and we kind of see more than three weeks ahead of ourselves.
So that’s number three – just pay your home loan down faster. Get started. Start with an amount that doesn’t even matter to you.
That brings us to number four, which I’m kind of talking about already.
4. Have enough income for your retirement.
People look at retirement in the wrong way like “I’m going to buy an investment property, and then I’ll be able to sell it and have a stack of money there at retirement… and then I can just eat into that big stack of money, and that’s going to fund my retirement.”
Firstly, that doesn’t work. I haven’t seen many people where that actually works. That is more just hope. In the crypto world, they call that “hopium”. That is basically you’ve got your head up your ass, and you’re lying to yourself.
A better way of doing this is looking at it for the long term and growing your pot. So whether that you might have some in property, you might have something in super, you might have investments all around the joint, however you want to do it.
But the objective should be to make enough income off your retirement investments to fund your retirement. Because if you have to start liquidating, meaning if you have to start selling some of your investments for cash to fund your retirement, your overall investment portfolio will decrease so quick.
The risk is that you will eventually whittle away whatever savings you have or whatever investments you have, and then at the end of the day, you’ll be left with not enough. What will happen is you’ll be on a government pension, which again, is closer to poverty. Obviously, you don’t want to be closer to poverty.
Wrap-Up
The most important thing here is that you put things into action from the start. For the generation of first homeowners now, it’s going to be the most challenging time of any first homeowners financially than any other generation. That’s just the world we live in now.
The next 10 years is not going to be as easy as what the last 10 years were. That’s just my opinion. But I’ve had this opinion for five years, and things have been going in that way. So from what I see that’s happening in the real world, that’s going to continue to happen.
My point here is that that means individuals like yourself, if you’re listening, need to take control of your finances. Structure is the most important thing because that gives you the firm foundation to live a life that you want to live.
A mortgage broker is a good point of call here cause ultimately a mortgage broker such as us here at Will Bell Mortgage Broker is the great place to start. If you are the person who wants to be responsible in your finances, we’d be interested in helping you. We can tee you up with someone to help out with the income protection because it is actually very hard to sort it out yourself for that sort of stuff, and anything finance related quite often you need those trusted advisors around you.
Anyway, that’s the episode for today. If you liked it, please reach out and let us know because that’s a sounding board to tell us that we’re talking about the life stuff. If you’ve got any questions about structuring things up, we’re happy to be a sounding board… things like potential investments as well, we’re happy to be a sounding board. Again, I’m not a financial adviser, but we do know the right places to seek information, seek help. That’s it for us today, til next time, catch you later!
Thanks for listening to today’s episode of the First Home Owner Concierge Podcast. If you’ve got any questions or you would like to get into your own home, or you just want to stalk me online, you can search Will Bell Mortgage Broker on either Google or Facebook.
Will Bell
Will Bell has 15 years’ experience in the finance industry, the last 11 years he has owned and operated Will Bell Mortgage Broker. He specializes in residential home loans and over the years has carved out a trusted brand. This is proven by the reviews his customers have made regarding the service and the experience he has provided.
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