“The things one is paid a salary for doing are never, in my experience, serious; never seem in the long run of any particular use to anyone”
We have a young couple that approached us about getting a mortgage. My partner’s cousin and his wife. They recently hit their savings target of 5% of the house purchase price. At this threshold the banks will lend them the other 95% in return for a lifetime of debt.
There is more emotion than ration in their decision making, but I tried my best to get four points across.
1. Run your personal finances as if they were business finances. Think asset, expense, liability. Don’t make spur of the moment decisions. Take time to think about things. There will always be another ‘ideal’ house.
2. Get a bigger deposit than the minimum 5% and you will add at least $1 m to your lifetime savings. At 5% equity a 7.95% loan with a low equity penalty of another 1% (so 8.95%) is going to drain your wealth. The $1000 per fortnight you pay back to the bank every fortnight for 30 years is virtually all giveaway money (interest). At the end of that first year repaying your mortgage you may have spent $40 or $50k, but only have paid back $500 bucks! A year of paying a lot of money to increase ownership from 5% to 5.1% isn’t inspiring. Besides there are better people to borrow money off than banksters.
3. You don’t need all those rooms. Buy a house with less rooms. It is cheaper and early on you won’t have any money for major furnishings. It can be depressing or you may find yourself buying furniture you can’t afford on credit. Buying a smaller house is a smart financial choice.
4. The most important advice is to understand and apply the example below. This is one of the only money lessons I would make sure my children completely understand. Therein lies the pathway to power and freedom in life without having to rely on winning the lottery. It is at the core of the the living simple philosophy.
You earn $100,000 (after tax) pa. In 4 years you will have earned $400k after the tax man and dipped his grubby fingers in.
Assume you managed to achieve a saving rate of 70% = $70k pa in savings or $280 over 4 years.
If you did that it means for 4 years you lived on 30% = $30k pa.
Dividing your $280 savings by $30k (your new living costs) = 9.3 years until you need to work again. Since that $280,000 is probably earning interest over the decade you can probably make it the full 10 years before getting your CV together again. Good news right?
The message: In 4 short years of economic slavery you could literally have the best part of the next decade off work or a substantial sum of money to put on a house or to put in a retirement savings account to compound until you feel old enough to retire from regular life.
Contrast this with saving 20% which only results in $20k pa savings. After the same 4 years working you have accumulated the $80k you need for 1 year off work. Depressing right?
Because this is percentage math income levels don’t matter, but if you are only on $30,000 per year you probably need to look at raising your salary as your first saving goal. It’s very hard, but not impossible to save 70% and live on 30% with such low earnings.