Your Life

These four things will consume half your lifetime income

- August 6, 2021 3 MIN READ
Lifetime income

Objectively (and in hindsight) a lifetime income is pretty outstanding, no matter how much you’re bringing in. So where does it all go?

When it comes to budgeting, it’s easy to target the obvious, like your takeaway coffees or bought lunches. But if you’re feeling deprived on your way to a goal, it can be tough to maintain; especially if it takes a lot of small cuts over a long time.

Our suggestion is not to sweat the small stuff. Go for the big wins instead. To help you do this, we’ve identified the four biggest expenses that eat up your income, and how to beat them.

Where you’ll spend most of your lifetime income

Over a lifetime, the average Australian will spend half their total income on just four things; home, car, kids and retirement. So how much of this lifetime income should we allocate to the ‘big four’? Let’s take a look.

1. Home

How much ‘home’ is enough? Here are two sound rules you can follow:

a.    Your home should cost no more than 4-5 times your gross family income.

b.    Your mortgage payment should be 35% of your take home pay (max).

Apart from the cost of your physical home, where you choose to live drives a lot of your other expenses. Human beings tend to look like their neighbours; we eat at almost identical restaurants, we send our kids to the same schools, we take the similar holidays and we shop at the same places.

Between all this, what do you really need and want? Do you need a garage worth $75K? Do the kids need a bedroom each? In an age of mobile devices, is a home office worth the additional cost to your home?

The old notion of buying the biggest house you can afford no longer holds water. When you’re a borrower (like our parents 20+ years ago), inflation is your friend. Today inflation has been tamed. There’s a whole new world of investment options out there today that can offer you greater returns for less effort than the old bricks and mortar rule of yester-year.

2. Car

No matter what you choose to drive, cars are a big expense; even more so if your household has two. So let’s start there; do you need two cars? Do you really need a car at all? Owning a car can be a luxury for city-dwellers, and possibly an unnecessary expense.

Car sharing and hiring services (like Uber and GoGet) make it easier to get around, and more cost effective than ever before. Perhaps you need to own a car; then the expense is a necessity. It boils down to thinking about what you really need first, then acting and budgeting accordingly.

A simple rule to stop your car eating up your income:

Your car should cost no more than three months’ pay (gross).

If you have two cars, they should cost no more than three months’ combined pay. This rule should reduce your transport costs to less than 10% of your take home pay.

3. Kids

No two ways about it, kids are expensive.

According to an AMP NATSEM report, it costs a middle income family $812 000 to raise two kids, lower income families about $474 000, and over a million dollars for higher income families.

Choosing to become a parent is a big financial commitment and there is no ‘one size fits all’ rule. The point is kids cost money, so be prepared with these figures as your guide.

4. Retirement

One of our greatest challenges is to pay for 90 years of life with 40 years of income. The first 20 or so are taken care of, as most parents foot the bills, but the rest is up to us.

First tip; ignore media reports that say you need a million dollars to retire. A million bucks would be great, but our brain is not designed to deal with (or even care about) events that are forty years in the future. Lucky we have compulsory systems in place like superannuation and the pension.

What you need to think about now is how you want to live later.

The bulk of your expenses will disappear when the kids leave home and your mortgage is paid.  If you plan to keep on travelling, other expenses will get bigger. If your life is a blank canvas, what outcome are you painting? What outcome do you want to paint? If you are under forty or have a big mortgage, here are my two top tips to get ahead:

    1. Sort out your super and make sure it’s earning well with the right type of account
    2. Follow a plan to eliminate your debts and pay off your mortgage

This is an edited version of an article that originally appeared on Life Sherpa and is republished here with permission. This article contains general information only. This should not be relied on as independent finance or tax advice. If you are after specific professional advice, speak to your registered tax agent/financial advisor or reach out to the team at Life Sherpa.