If the decisions we made yesterday have shaped our ‘today’, then the decisions we make today will shape our ‘tomorrow'.
Financial stress is an ever present danger…it risks eroding one’s tranquility, is detrimental to one’s emotional health, and unfortunately all too often it means the destruction of the family unit. I do not intend to be melodramatic, however I have seen too often children lose the security of an intact household due in part to the significant pressure on the marriage of financial stress and hardship.
Quite against common perception of this being a problem lower-socioeconomic households endure, it is quite the opposite. In my professional experience, the larger the income, the larger the commitments and the more devastating the outcome can be if obligations are not be met. There is also the all too common failed business venture, or non-diversified investments, which do not produce the fruit that had been anticipated.
There is an old proverb that says ‘the borrower is slave to the lender’. The vast majority of financial hardship is caused by over-indebtedness. There was once a time, in the not too distant past, when in order to get a home loan or even a personal loan from a bank, the potential borrower needed to have had full-time employment with the same employer for at least two years, and have lived in the one residence for at least two years also…to prove stability of income and life in general. Oh, how times have changed!
It would be safe to state that we cannot rely on the lending institutions to assess our ability to undertake a debt. Indeed, this is one important decision that we surely cannot outsource…if we get it wrong, then life can take a very negative turn very quickly.
So, what are some basic steps for reducing financial stress in your life and your marriage? Here are a few:
1. Budget budget budget. Just like many a good business has hit the wall due to taking its eye off cashflow, so too have many families. Running a budget has a twofold benefit. Firstly, it can focus your attention on how much discretionary spending is actually being spent compared to how much you budget for. Secondly, by continuing to measure yourself against your budget, it can create significant advanced warning if your expenditure is exceeding your income, and thus provide time to rectify the situation.
I have a gym membership, but as those who know me can vouch, I clearly do not use it as much as I should. A budget is the same as a gym membership…simply having one will not provide any results, you need to use it. Every three months (or more frequently), measure yourself against your budget to see how you are tracking. If you were meant to have saved a certain amount over that time, check to see if you have reached your goal. If you have, great, reward yourself somehow! If you have not, then be honest with yourself and go searching for where the spending went wrong. When saving for our house deposit, my wife and I would each get $100 for every $10,000 we saved, which provided a reward…it is important to reward achieving your goals.
If you would like a budgeting tool to aid in this exercise, please let me know and I will be happy to provide you with this.
2. Segregate your expenditure. You are not Robinson Crusoe if you put all of your spending on a credit card, with the view of paying it off each month within the 55 day interest free period. This is all well and good, however it makes keeping track on spending just that much harder.
It may be fine to put the non-discretionary spending on the card (and clear it each month!), such as insurance, rates, groceries, petrol etc. However, can I encourage you to use a ‘cash economy’ for discretionary spending, such as a weekly allowance for coffee/lunch/alcohol; and things such as holidays, clothes and gifts. If you use CASH, and you withdraw each week your ‘spending money’, then you KNOW when it has run out…and at this time, do not reach for the card, just stop spending!
The same is true for holidays….open a separate account and put aside whatever amount you have budgeted for holidays in each pay cycle. Then, when it comes time for the holiday, the amount saved dictates where and for how long you will holiday. Do not put it on the credit card…if you cannot afford the desired holiday, delay it and keep saving until you can.
3. Take ownership. NEVER ask the bank “what is my borrowing capacity?” and never use a calculator to determine this. As mentioned above, this is too important an issue to outsource. YOU work out how much YOU can afford to repay. This will be that much easier if you have created and using a budget.
And do not forget…when calculating what repayments for debt servicing you can afford, ensure you add an increase of at least 2%! Afterall, we are at record low interest rates. With many househoulds being less than two months ahead on their mortgage repayments, it would take only a small interest rate rise to 'send them to the wall'.
If you are a couple who are ‘just getting by’ financially paying of your mortgage, then some urgent action is required. To give you an example, if you are a couple with a mortgage of $500,000, then an interest rate rise of 3% will mean an increase of close to $300 per week! If you are living pay-to-pay now, with interest rates at historic lows, then the chance of losing your house is REAL if/when interest rates increase. You need to take action now, because most economists and Financial Planners (myself included) anticipate the next interest rate move by the RBA to be up, and to continue going up over the next several years.
4. Diversify. Whilst the truism of not having all of your eggs in one basket is something that people inherently know intellectually, many people tend to forget it when making large investment decisions. Such as having a home, and thinking that buying an investment property is a wise investment decision. It may be….it may not. I will not bore you with a conversation about correlation between different asset classes in this article, however suffice it to say that investing in assets which have a low to zero correlation to each other (ie. each investment is not reliant or following another investment) can significantly decrease your risk, and increase your return potential over time.
5. Have Contingencies. As mentioned in point 3 above, having a cash buffer and strong cashflow is critical. Having 3 months’ of net income in cash savings is a good minimum rule of thumb. It is also vital to ensure that your income and earning capacity is protected. Financial Planners are well suited to calculate the different strategies and insurance required to help protect you and your family. As a side note, ‘insurance is not insurance’. If you believe that the default cover in your super, or a policy you bought over the phone, is a quality and adequate level of protection, then you may be in for quite a surprise as to the ‘fine print’. Seek advice and get quality cover in place.
6. Seek wise professional counsel. Before launching into a business endeavour or major investment decision…particularly when your house is implicated, and especially when debt is a part of the strategy, ensure to seek wise counsel who have expertise in the field. No, this does not mean your friends at a BBQ. Certainly, speak to your friends, however seek professional advice as to whether your intended action ‘stacks up’.
7. Have a plan! Seek advice, measure your achievements, and reward your success!! Having a strong, achievable and measurable Financial Plan is critical. A Financial Planner can be an invaluable source of advice, mentorship, and counsel in financial matters. If you have one, leverage them. If you do not, find one that you can work with and get a plan in place.
8. Be on the same page. It is well and good for one party of a marriage to be steadfast in implementing the above, however if their spouse is not of the same mind, then it can cause greater friction and not less. Should this be the case, can I implore you to bring in a professional third–party to help. It is important that a compromise and middle-ground is reached, which is true for marriage in general, and to ensure that both members of the couple are working toward a commonly shared goal.
Please, whatever you do, DO NOT fall into the trap of justifying over-expenditure. There will always be a reason to have spent more than you intended...providing you look hard enough. Stop..be true to yourself and be disciplined. Some common sayings, which I hold to be true, are ‘generating wealth is a spending problem, not an earning problem’ and ‘It is not about how much you earn, its about how much you keep!’
The encouraging thing is that you do have the ability to change your financial future. It will take discipline, tenacity, and a refusal to weakly justify any failure. However, I can assure you, your future can be different from your present and your past.
As mentioned at the start of this article…if the decisions we made yesterday have shaped our ‘today’, then the decisions we make today will shape our ‘tomorrow'. Get inspired, seek help, set goals, and move toward financial freedom! If you do not have a Financial Planner, then please feel free to contact me via the ‘contact us’ section of our website, to set up an initial consultation. It would be an honour to serve you.
About the Author
Glenn Baker is a Certified Financial Planner, and the Senior Financial Planner and Principal of Adept Financial Planning Pty Ltd, a Corporate Authorised Representative of Capstone Financial Planning Pty Ltd (as of 02/08/2019), AFSL 223135, ABN 24 093 733 969.