Ideally, a lifetime income should last the rest of your retirement years, in spite of how much you’re bringing in. So where does it go?
In relation to budgeting, it’s easier to target the obvious, such as your bought lunches or takeaway coffees. However, it can be tough to maintain if you feel deprived on your way to a goal, especially if it takes a lot of small cuts over time.
Do not sweat the small stuff, and instead, go for the big wins. And to help you with this, we’ve identified the four biggest expenses that will consume your lifetime income, and how to prepare for them.
The average Australian will spend half of their total income on these four things; home, car, kids, and retirement. How much of your lifetime income should be allocated to the ‘big four’?
Here are two basic rules you can follow when allocating a part of your income to your home:
- The cost of your home should be no more than 4-5 times your gross family income.
- Your mortgage payment should be 35 percent of your take home pay.
Outside the cost of your physical home, where you live determines a lot of your other expenses. People tend to emulate their neighbours, in which we eat at the same restaurants, we send the kids to the same schools, we shop at the same stores, and we take the same holidays.
But what do you really need and want? Do you want a garage worth $90K? Do each kid need their own bedroom? Do you need a home office and is it worth the additional cost to your home?
You should really think carefully how to add value to your home. Are these improvements going to offer greater returns to your investments or will they just cost you more in the long run?
Whatever car you choose to drive, they are a big expense. How much more if you have two in your household? So let’s begin there. Do you really need two cars? Do you need a car at all?
Owning a car can possibly be an unnecessary expense for city dwellers. Car hiring and sharing services such as Uber and GoGet make it easier to get around, and are more cost effective than maintaining a car. If you really need to own a car; then the cost is a necessity. It all boils down to considering what you really need first, then act on it and budget accordingly.
Here’s a basic rule to prevent your car from eating up your income – the cost of your car should be no more than three months’ pay. If you own two cars, they should cost no more than three months’ combined pay. This simple rule should help reduce your transport costs to less than 10 percent of your take home pay.
3. Kids can definitely consume your lifetime income
It’s true that having kids is expensive. If you choose to become a parent, be prepared for a big financial commitment where there is no ‘one size fits all’ rule.
According to the AMP.NATSEM Income and Wealth Report, it costs $812K to raise two kids for middle income families, about $474K for lower income families, and over a million dollars for higher income families. Kids cost money so consider these figures as your guide.
Paying for 90 years of your life with 40 years of your income is one of the greatest challenges we can all face. Our first 20 years or so are taken care of, as our parents foot the bills, but the rest is our responsibility. Luckily, we have compulsory systems in place such as superannuation and pension for when we retire.
If you are under forty or you have a huge mortgage, here are some tips to get ahead:
- Sort out your super to ensure it’s earning well with the right type of account.
- Set a plan to eliminate your debts.
A lot of your expenses will be gone when the children leave home and your mortgage is fully paid. But if you plan to still travel, other expenses will get bigger.
Using the ASAG Reverse Mortgage to supplement your lifetime income
At ASAG, we support our Australian customers, who are about to enter retirement or already in retirement, by offering our equity release solutions. One in particular is our reverse mortgage.
One of the benefits of acquiring the ASAG Reverse Mortgage to help supplement their income in retirement. It allows you to access the wealth in your home without ongoing payments and having to sell your property. The loan is paid off when you permanently leave your home, either you downsize, move to aged care, or pass away.
The ASAG team can assist you with all the details you have to know on how the loan works. Our lines are open on 1300 002 724 and at firstname.lastname@example.org so you can contact us or send your enquiries about our equity release solutions.
You can also get started by using our free tool below to assess your available equity.