You may notice you're becoming more financially savvy when you understand:
the differences between investing and spending
the effects of compounding
different loan structures
Our available ability to spend money has never been greater. Now we can even make decisions about purchases after a few drinks while we're online... Or after we've had a really bad day at work... Or even if we're just feeling lonely or bored.
As we all know some days we can feel like there's been nothing in it for us... Except shopping.
And when our purchase arrives it's even like a present, all wrapped up. And because we haven't ever seen it before there's an element of surprise like a gift for us.
It's genius from a seller's perspective. You go online, look at beautiful clothes on beautiful models, there's no back fat like there might be if we tried things on, there's no crowds, no parking, no traffic. And best of all there's no fitting shopping in around everything else in your life. It's just soooo convenient. We can even do Christmas shopping during our lunch hour.
Even lay-bys have also been largely replaced with After Pay, whereby you get the product now and pay later. So all of us can have what we want anytime we want and all we have to do is click a computer mouse. And considering most of us don't have self control issues... What could go wrong?
I found the beginning to becoming more financially savvy for me, was understanding the difference between spending and investing.
My understanding is, spending is trading money for goods and services while investing is using money to make more money.
Now I'm not sure how you feel about it, but having the money to go shopping to buy clothes and shoes gave me a feeling of pleasure. That there was something directly in it for me for all my hard work.
But I quickly learned that if I spent my money on things like clothes (that I grew tired of, over time) it was gone and my choices were larger things were reduced as a result. (holidays, replacing the car, renovating the bathroom, etc.)
Luckily for us, my husband gave me an awareness of the value of forgoing something now, for a larger benefit later, while I was still quite young. Prior to meeting him, what I earned I spent, and I had very little savings at the age of 23, when I married him.
In fact our combined wealth on our wedding day was $67 after I'd paid for wedding expenses and he bought a replacement car.
Not an auspicious beginning... Yet now we own our own home, have an income stream and additional investments.
So how did this happen?
You may be aware many financial advisors will count the cost of owning your home as a cost rather than an investment. And it is a cost.
But due to current tax laws in Australia, if you redeem your main residence at a profit, you don't pay capital gains tax on your profit.
Because tax laws change from time to time for current information regarding capital gains tax on main residences paste the following web address for the Australian Tax Office into your address bar for current advice:
When we got married I drove a yellow Volkswagon Super Big, similar to the vehicle above. It was already around twelve years old when I traded it in. I got almost the same amount I paid for it, seven years later, because it turned out to be a popular car. But that's a rarity.
Interestingly, although I had told the dealer I was paying cash, he attempted to sign me up for a high-interest hire purchase agreement. This would have made the used car much more expensive. (Luckily I wasn't intimidated by his brusque manner into signing the document he was pushing me to.)
Alternatively, if the purchaser bought a car for just $5000, and invested the remaining $25 000 into a low fee superannuation fund, at the age of 60 they would have around $283 000 worth of superannuation, (due to compounding.) This is based on an 18 year old not paying another cent towards the superannuation, (except for their employers contribution of 9.5%: on an income of just $50000 a year)
But what my husband and I did differently to many of our contemporaries was we drove our cars until they either became unsafe or mechanically wore out.
In our case we drove safe, yet older cars, and we paid cash for all but one of them.
And I believe that was one of the greatest reasons we saved money when others did not.
If you received a tertiary education in a field in which you can be readily employed, over time you can make up the costs of your education and the loss of income while you undertook your study. However if your course does not prepare you for the work force, you can be placed at financial disadvantage. Just an aside... My eldest son, received an income of around $55 000 in his first year as a doctor, after all of those years of study. And he came out of Uni owing slightly less than a full first year wage.
One option could be if when someone leaves school and doesn't really know what they want to study, instead of going straight into University they could go to TAFE and get a Cert 4. Then after working for a period of time in excess of one year, they can get Youth Allowance to go to University, in a course they've had more time to research and want to go into. There are many options available and by saving money at the beginning of their life it can have a positive roll on effect later in life due to compounding.
Education costs often begin for children with child care. And some child care centres charge similarly to private school fees.
I'm going to begin with major purchases.
Buying Our Own home
To begin we saved, and when we bought our first home we bought in the best area we could afford.
And any subsequent purchases we did the same thing. We always bought the area rather than the home.
We also learned that while the value of any dwelling on a property usually depreciates, the value of the land appreciates.
In Australia, coastal suburbs have historically increased in value more than inland ones. And cities have appreciated more than regional areas.
Therefore as you increase your equity in your main residence, you can trade up as your family needs more space, or you can trade down as you reach retirement age and you need less space.
It's when you trade down you finally realize the investment potential of your own home.
Purchasing a Car
Some things to consider:
As soon as a new car is driven off the lot it will have depreciated, and depending on the deal made in the first place, it may have lost 20% to 30% of what was paid for it within a year. Within five years it may only be worth around half of what was originally paid...
However, if the purchase money of $30000 was borrowed through a personal loan from a bank (over a standard five years,) depending on the interest rate the purchaser may pay back between $41,700 to $47,300. (And loans through a bank are often cheaper than some other forms of car loans.) Remembering this is for a car, that five years later may be worth around $15,000. A car is rarely an investment.
But by purchasing an expensive car while young, the owner may still be paying for it well into the future, due to loss of opportunity. For example: Any personal loans are considered as debt when looking for housing loans and it will affect the applicant's borrowing capacity thus affecting the areas they can buy into.
There is an old saying: Drive the worst car your ego will allow you to drive.
Costs of Education
I'm including education as a significant and recent cost to families and whether is remains a cost, or becomes an investment largely depends on the form it takes.
To make my position clear, I believe that education is one of the few costs that make a long term positive difference to the quality of individual's lives and subsequently their children's lives. And it can be transformative.
However I don't believe that the debt some young people are currently accruing, will add to their quality of life.
In some cases I'm concerned that it may become burdensome.
In Australia many people qualify for HECs funding which means they can have a tertiary education and pay the costs back over time as they become employed, and are perceived as being able to afford it.
Often graduates from university enter the work force later than those who took up trades. And HECs loans are considered as debt when applicants are looking for housing loans, affecting the graduate's borrowing capacity. This may affect the areas they can buy into when looking at housing.
This in turn can have a roll on effect when it comes time for University graduate's children to go to school, as their local public school may not be ideally situated where they live (because that's all they could afford to buy into.) As parents, they may even be concerned private education may be a better option than their local state school. Therefore they take on an additional burden of paying for an education that could be provided for free by the state. Current private school fees for a Year 12 student in Australia can run out between 22,000 and $44 000 per annum... Is it even possible that in some cases, relocating to a higher socio-economic area while your children are of school age, may be a reasonable financial alternative? The additional costs of housing could be offset by not paying private school fees.
DISCLAIMER: Any suggestions of what worked for me financially may not work for you in your circumstance. This information is accurate in Australia (to the best of my knowledge) at the time of publishing. But tax laws, fees, charges, rules governing tertiary enrolments, government rebates and interest rates change from time to time. It's therefore your total responsibility to check that any information on this website is still current and correct prior to you using it to inform your decisions. It is suggested you seek financial advice from a registered financial advisor.
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