This is part four of my eight-part series on how you can beat the banks at their game and get yourself out of debt.
Buying a house is an exciting, nerve-wracking experience. It’s one of the biggest financial decisions you will make. Yet instead of consulting an accountant or financial planner first, most people go straight to a mortgage broker to see how much money they can borrow.
It’s a common trap. The mortgage broker offers the maximum loan possible. People choose a home with a huge mortgage. It’s only after they sign the contract and move in that they start working the numbers. Then the money struggle begins.
Home ownership is a risk. Risk in itself is not a bad thing; if you don’t take some risks in life, nothing changes. Your wealth will not grow. But financial risks must be calculated. They must include a strategy based on your money context.
As a financial adviser, I see many people wanting to do things they cannot afford. They let their wants and desires drive their financial decisions. When finances become tight, they rely heavily on their credit cards. Their debt snowballs. This can be avoided if they create a financial strategy based on their income, repayments and realistic long-term goals.
Buying a house requires significant financial scrutiny. It’s a decision that determines what you can and cannot do over a long period of time. It determines whether you can buy investments such as shares or property, whether your children can attend private or public school, and whether you can salary sacrifice more into your super fund.
Ultimately, the family home determines whether you can become self-funded at retirement. Many retirees are asset rich and live in expensive homes in expensive suburbs, yet they are cash poor and survive on the pension. Could you live on $22,542 per single, or $33,982 per couple, for 20 or 30 years? Is that what you want your retirement to be like?
Calculated risk involves taking stock of all the extra costs home ownership entails: council rates, water, strata (if living in a unit), building repairs and maintenance. Renters wanting to buy their first home often overlook these costs. They compare their rent with mortgage repayments and are happy to see there isn’t much difference. Yet they fail to budget for the expenses paid for by their landlord. Once they buy their home and the bills start rolling in, they cover the extra costs with their high-interest credit card.
So how can you become more money aware and take calculated risks?
Work out your money context with an accountant or financial planner. Ask yourself the following questions to help understand what impact your decision to buy a home will have on your cash flow, tax position and family budget:
1. Can I really afford the monthly home loan repayments, as well as council and water rates, repairs and maintenance?
2. Am I prepared to pay the home loan over the next 30 years? How much do I need to increase the repayments to pay the loan in 20 years?
3. Can I invest in other assets while paying off the home loan?
4. How will the monthly repayments impact my budget?
5. What if interest rates rise another 2%? Do I have a cash flow buffer to manage the increase?
6. Do I have an emergency savings account in case the property needs urgent, expensive repairs?
7. When do I need to renovate the house? Will I have cash set aside for renovations, or will I need to refinance? How much would that be?
8. Can I afford any other investments while paying off the home?
9. What if I stayed in rented accommodation instead, and bought investment properties based on a proper financial plan? What would the tax and cash flow consequences be?
Being too financially cautious will not grow your nest egg. But putting all your eggs into one basket won’t help, either. You need a middle ground – a calculated risk, using your numbers to work out your strategy – to ensure you don’t hit financial trouble and rely on your credit card to pay the bills.
Download the first three chapters here: http://www.moneyintelligence.com.au/free-stuff/
Stay tuned next week for Part 5: Don’t Allow Your Emotions to Blind Your Better Judgement.
Susan Wahhab —CPA, SMSF Specialist, Entrepreneur, Working Mum, Small Business Supporter— is Australia’s leading Financial Strategist and Money Mentor. Susan is the founder and managing director of Accounting and Financial Services firm Winner Partnership Pty Ltd www.winnerpartnership.com
Susan is the author of the transformational and practical book Money Intelligence®. Susan is passionate about helping women achieve financial liberation. At the age of six, she witnessed how her money-savvy mum (whom she calls the money manager) joined forces with her dad (whom she refers to as the money maker) to save the family business from bankruptcy and become financially free. Susan truly believes that people can become financially liberated by developing a healthy relationship with money. Learn more about being money intelligent www.moneyintelligence.com.au