Are rising energy prices starting to bight each month?
You’re not alone. Financial freedom is quickly becoming an unattainable dream for renters and homeowners alike.
Why is financial freedom a dream for many?
The first taste of financial freedom any of us gets is the day we receive our first pay check. Up to that point, we usually rely on our parents to provide us with pocket money.
What we don’t learn is how to use that money.
The problem? Once we start earning more money many of us start on a path of spending that leads to us giving up our financial freedom.
In 2015-2016, ABS data revealed that 15 per cent of Australian households met ABS criterion for financial stress ̶ approximately 900,000. This number continues to rise as people enter financial arrangements they do not fully understand (read more about finding home loans that you can afford here).
So how do you keep your cash for longer?
To avoid getting yourself into financial stress, including mortgage stress, see whether you can tick off at least a few of these 10 steps for finding financial freedom.
1. Separate your banking
Create a few extra bank accounts (it usually only takes a few minutes online or on your bank’s app). The basic structure to help you save is to have an account from which you pay for the essentials of life (bills, food, rent or mortgage payments), an account from which you buy the luxuries of life (coffee, alcohol, meals out etc.), a savings account for those big purchases (a deposit on a house) and an emergency account in case you lose your job etc. (ideally worth 3 months of income). To make things extra simple, add another account just for your rent/mortgage repayments. This way you know that your most basic payment is covered.
Set these accounts up so that your income automatically transfers to them on payday and you have already done more than most people in helping yourself to escape debt and find financial freedom.
2. Reassess your needs
This is the most obvious step in finding financial freedom and often the hardest to achieve. It involves a significant change in your mindset and is easier said than done.
Essentially, you need to reconsider your spending/investing if it is at the limits of your financial reach. If a bank approves you for a loan of $800,000 don’t just look for houses in that specific range, especially if such an investment stretches your financial resources to their limit.
This is a common mistake that places many households in trouble. Invest in what you need first and foremost.
According to Matt Barrie, CEO of freelancer.com, “Australia’s household debt servicing ratio (DSR) ties with Norway as the second worst in the world”. If you can save yourself from financial stress by making sacrifices on what you want rather than what you need, do it!
3. Be cautious of debt
The number one example of this: your car. Pay for your car with money you have, and if you can’t then don’t get a car.
Accruing debt for something that does not provide financial returns (such as capital gains in a house) is one of the most common practices for people and creates significant stress. It is the definition of bad debt. The only occasion where it could be considered good debt is if the car is to be used for work and will provide you with an income.
4. Avoid that lifestyle creep
‘Lifestyle creep’ is the way in which we develop unhealthy spending habits from the moment we get our first pay check. One example of this is the slow accumulation of debt due to a reliance on multiple salaries.
If you have two incomes, rely on the larger income and save as much of the other as possible. This forces you to save and helps you develop a financially beneficial mindset in case one of you does lose your job or does not work for some reason (kids).
Being aware of lifestyle creep is the first step in addressing it. Anyone will tell you that as they have earned more income, their spending has simultaneously increased. This makes no sense, but you will probably find you have done the same. While you don’t need to live like a monk, why does more income necessarily mean more debt?
5. Pay with cash
Try using cash when possible for your everyday payments.
There are a host of studies done on the effects of credit cards on our expenditure levels. It just makes sense, doesn’t it? If we can’t see the money we spend, we spend more of it.
6. Cut the card up
Beyond balking at the idea of cutting up their credit card, some people are so indoctrinated into the system of credit that they will try to tell you that credit cards are good for your finances.
If you are struggling to find financial freedom, the last thing you need is easy access to debt. There is no such thing as ‘credit’, just debt. Debt can be fine if it is in pursuit of higher earnings (such as property investment), and admittedly it underpins the entire system of capitalism on which the majority of the world functions, but rarely is small-scale debt beneficial for your wallet.
What to do?
If you have a significant amount on your credit card and are truly determined to rid yourself of it, cut your card up. You can easily get a new credit card later on. Banks are desperate to get you onto a credit card; even kids have them.
7. Place responsibility in the hands of the irresponsible
Place the household finances in charge of the person who seems to have had the worst track record with their finances.
Work with them to change their spending habits. If the most responsible/financially literate person in a household is the only one taking care of finances, then you have a power imbalance and are asking for arguments.
8. Explore the world of compounding
Make regular small investments in long term stocks and enjoy the benefits (in 40 years) of compounding. This is where the dividends you receive from stocks are reinvested in your stock options. It is the basis for accumulating long term wealth and should be applied to your banking as well (use compounding interest to make long term savings). Use view.com.au’s Savings Calculator to see the effect of compounding on your savings.
9. Reassess your super
If you can afford to make additional payments to your super, do so, while make sure to look at how your super is invested. If you are younger then you can afford to take larger risks and change how your super is invested.
10. Reassess your bank
What fees does your bank charge and what interest does it provide on your savings?
Too many banks now operate without the overheads of bricks-and-mortar branches, so they don’t have to charge fees on their savings accounts. The writing is on the walls for those banks that continue to charge large fees and offer comparatively small interest rates; customers continue to flock towards smaller banks that offer more competitive rates.