Yes I know, we don’t really use the terms lower, middle and upper class these days. Of course there will always be divisions in household wealth, and this piece is directed at the middle income earners – a household income of somewhere between $90,000 – $150,000 with between one and three financially dependant children. I’ve been in financial planning for 15 years now, so it’s fair to say that I’ve seen a lot of variations of household income and spending habits in that time, well and truly hundreds of variations.
You may not believe this, but it is true that some of my low income clients are better savers and budgeters than my higher income earning clients. It’s a pretty common phenomenon, that the more we earn, the more we spend. There is actually no end point – you may fool yourself into thinking there is. As in, currently let’s take Jack and Jill with 2 young kids who are on $100,000 between them and they think they would be just that bit more comfortable and happy with their life if they could earn $150,000 between them. So Jack goes and works up north on a 2 weeks on, 1 week off roster. 12 months later, despite the fact Jack and Jill don’t love the FIFO lifestyle, they have accustomed themselves to this new income. They upgraded the car using a $40,000 car loan, took an overseas holiday, enrolled the kids in a few extra-curricular activities and Jill has a nicer shoe collection. However, they haven’t actually put any savings aside despite this increase in income. They have simply added more cost to their lifestyle. And once you’ve moved up, it’s very hard to move back.
Phase 2 for Jack and Jill, Jill goes back to full-time work too so now they find themselves on $200,000 a year. They now decide the family home is too small and dated so they sell it and buy a newer home in a more desirable suburb and double the mortgage repayments. They also feel it’s time to purchase a caravan because they would love to spend more weekends away with the kids. They haven’t paid off the new car yet, but they take out another $40,000 loan for a caravan. You see the pattern I’m getting at here. It doesn’t really end – you can keep on moving up to a more expensive suburb, more expensive house, more expensive car, clothes, furniture, schools etc….. there are price categories you haven’t even thought about until you start working your way up the income ladder. And suddenly they suck you in and take your hard earned dollars keeping you on the perpetual treadmill of working to pay for your lifestyle.
I’m all for enjoying the now, but I also am all about being financially secure in case of a family crisis, and getting to the point where you can chuck the job in and be financially ok. The sooner you can achieve this the less stressed you will feel about your life. Here are some of the common budget busters I encounter in the middle-income bracket:
- Annual overseas holiday – I know travel is more affordable these days and there are so many interesting places to see. However, this is a huge expense and it is not essential. Holidays can still be had, but more economically if you are trying to kick financial goals at the same time. Our home state has some amazing places to visit that don’t have to cost you the earth (Esperance is pictured).
- Convenience food purchases – I’m guilty of this and have recently begun to crack down on it! $5 for a muffin at a coffee drive through, seriously, it’s a lot. I can make 12 regular sized muffins for $5. This category includes bought lunches, takeaway dinners and things that don’t seem significant at the time but add up to a whole lots of thousands of dollars a year. A bit of forward planning into your week can help you to avoid these unnecessary costs. Or if you really hate taking leftovers to work (still applicable to me), then purchase a large tub of soup and some rolls and heat up what you need each day – it will only set you back a few dollars a day instead of the typical $10 for a meat and salad roll.
- Weekends away – well thank you facebook and instagram. We see our friends on these cool weekends away in these gorgeous places, and gosh it just seems like such a good deal. We can go away for two or three nights and stay in an air b’n’b for $700 or whatever, we also eat out at every meal and get stuck into the local shops (supporting the economy). Do this times about 6 times a year and you are looking at a lot of money. Expensive way to make memories. I’m all for weekends, or weeks away, but within parameters of your budget.
- Eye-watering shoe collection – for some it might be clothes, for me recently it’s active-wear. It could be home wares. Whatever your penchant, those marketing geniuses sure know how to lure our credit cards out and spend big at their weekly “40% off sales”. Online shopping makes this very, very easy to do. So again, set a budget for these splurges and stick to that. Don’t just buy whatever you want, whenever you want.
- Extravagant birthday parties – I’m a lazy parent when it comes to kids birthday parties so this doesn’t appeal to me. I hardly see birthday parties in a budget because they are not a necessity, but I know a lot of people who spend a lot of money on their kids parties. Do you need to do it every year, for every child, for their whole class? I don’t think so. And as a parent of kids who get invited to parties, thankfully I’ve noticed as your kids get older they get invited to a lot less. Because seriously when your children are in kindy and get invited to 20 birthday parties in a year, it’s a lot of presents to buy (or $20 in a card for me, I did tell you I’m a lazy parent).
- Concerts, sporting events, events in general – I’m not saying don’t go to these things. By all means, if it’s your favourite artist coming to your home state then go and have a fab time. But you don’t need to go to a concert or event every second week, because far out, they are expensive! Especially if it also includes aforementioned weekend away.
- Cleaners – 2 hours a week, $50 an hour. Look I envy you if you have one. I feel that soon I may have to succumb to this myself. However, your children that have little arms and legs also need to learn how to clean. Mums and dads don’t have to do everything. Pocket money works wonders. In my home we don’t save all our cleaning for one day a week, as in spending half a day on your precious weekend time doing chores. We just do a little and often, then deep cleans once in a while.
So going back to Jack and Jill’s situation, what you could do different if you suddenly experience a big increase to your household income. One example is this. Divide your extra income into five equal portions. One portion can be used to increase your mortgage repayment. Two can be used to build up an emergency fund (separate to the home loan redraw). Three can be used to start an investment. Four can be used to add to your long term superannuation, and the fifth portion can be used for your extra lifestyle desires. It may sound boring but you will be miles ahead if you follow this type of plan as opposed to just increasing your lifestyle expenses.
And if you’ve never done a household budget, do one. You will be surprised where your money goes when you start looking properly. For a link to a good template go to the ASIC Money Smart website here —-> https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner and once you’ve done it review your budgeted expenses and your actual expenses regularly to adjust as you go. Good luck!
Shonel x
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Unless specifically indicated, the information contained in this blog is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek personal advice from a financial adviser.
Shonel Vuletich is an authorised representative of Synchron, AFS Licence No. 243313.
The Business of Life 