How to buy a home and still have a life
With the cost of buying property on the rise, many families and individuals are sacrificing other financial commitments to afford the home they want. So how can you budget for your home without being too frugal in your savings and spending? We talked to CERTIFIED FINANCIAL PLANNER® professional Michael Hayward from Capital Partners about getting the balance right between financing a home and other lifestyle goals.
What advice would you offer families and individuals to help them prioritise financial and lifestyle goals?
It’s much easier to put your goals in order when you’re clear about what they are and what it’s going to take to achieve them. By following a simple 7 step process for clarifying your goals, you’ll get a better idea of where to start.
- Give your goal a name that’s meaningful and motivating.
- Outline your goal with a clear description that will bring it to life.
- Put a dollar value against your goal, taking into account all the costs involved to achieve it.
- Set a date to give you a timeframe for reaching your goal.
- Look at the benefits so you can understand just how committed you are to making it happen. Ask yourself “what would I be thinking and feeling having achieved this goal?”
- With those benefits in mind, ask yourself if the goal is worth the effort it takes to achieve it.
- Review your progress. This can give you encouragement and help you determine how important a goal is to you when your plans and circumstances change.
After you’ve gone through these steps, a financial planner can offer practical advice to help you achieve them. They can also help you to stagger your schedule and plan your budget for meeting your goals if you don’t have the money to fund them all right now.
How can you get a healthy balance between the goal of home ownership and other financial priorities?
Once you’ve applied the 7 step process to all your financial goals – including buying a home – it’s important to understand the consequences of focusing on short term goals while your longer term goals take a back seat. For example, you might be determined to save all your extra income now to buy your first home. That might leave you with no savings for that big overseas trip you’re planning in 5 years’ time, or lead to having a lot less super saved for your retirement. With all these things in mind, it can be easier to strike a balance between saving for that first home and saving or investing for other goals.
No matter how important owning a home may be, I would always encourage first home buyers to take some action to prepare for their financial future. One of the greatest investing tools available is compound returns. By saving and investing sooner, time and the reinvestment of earnings on your asset can bring you long term financial benefits.
With a financial plan in place to address your goals, it’s easier to understand the tangible benefits of saving and investing for the future. A planner can help you forecast the outcome you can expect from taking steps towards those goals – such as modelling the extra retirement savings you can look forward to if you were to salary-sacrifice some of your income now.
When it comes to borrowing more for your next home, what other financial priorities should you keep in mind?
Increasing your level of debt, for a mortgage or any other type of borrowing, will have an impact in three important areas of your financial plan:
- Cash flow – before you decide to borrow more to make the move into your next home, you need to have enough surplus income to support higher repayments, even if interest rates start to go up.
- Other financial goals – with higher loan servicing costs, you’ll have less capacity to save or invest money. And that could have an impact on other financial goals like saving for a holiday, your children’s education or your retirement. You’ll need to be sure this is a trade-off you’re willing to make to upgrade your home.
- Personal insurance – increasing your loan should trigger a review of your personal insurance plan. You need to have an adequate financial safety net in place to cover the loan repayments in case something should happen to you.
How important is it to be mortgage free before retiring?
The answer really depends on your circumstances and the financial plan you’re following. However, being mortgage free on the home you’re living in before retirement seems to be an important goal for most Australians. By having your mortgage repaid by retirement, you won’t need to draw extra income from your retirement assets and earnings to fund mortgage repayments. Delaying the drawdown of your retirement assets increases their exposure to the powerful benefits of compound investment returns. And this creates greater potential to boost your retirement income, now, and in the future.
Whether you’re a first home buyer or getting ready to make a move to your next property, a CERTIFIED FINANCIAL PLANNER® professional can offer valuable advice on preparing for a secure financial future and managing your budget so you can achieve all your goals.
Online source: Produced by The Financial Financial Planning Association of Australia and published on 06 July 2017. Original article.