The cost of living is tipped to increase rapidly in the coming years. Many Australian’s are already feeling the rough end of the economic stick as food prices, petrol and soon interest rates begin their ascent back to pre GFC highs.
As the economy recovers, so does our appetite as consumers to spend. This means that in bad times we reign our spending in, while in the good times we frivolously find ways to use money – and lots of it. My prediction remains – we are going to be in for a rude financial wakeup call very shortly should we not act now.
How leveraged are you?
Buying an asset often requires a loan. It is human nature to want bigger and better, which is a dangerous combination when it comes to borrowing money for a purchase. A good stress test is to see what your home loan or personal loan repayments would be should the variable rates increase.
Often I will use a basic online calculator to check what my repayments would be under a multitude of interest rate scenarios. Understanding your upper limit is both interesting and essential for anyone leveraging themselves for a purchase. No point buying something in the good times if you can’t hold onto it in the bad times.
Are your assets wasting your time?
Assets are essential for growing our net worth. We want the house paid off, a nice car paid off, a savings account for the kids, a share portfolio for retirement – we seem to have a lot of wants and no plan to acquire them beyond working ourselves into the grave.
Instead, it is wise to take stock of your assets regularly and ask yourself whether or not they are wasting your valuable time and in turn your potential to earn. Whether you own a second car, a holiday house or a bunch of shares that are going nowhere after many years – have a think about whether that money could be better used elsewhere. Sometimes it’s wise to think in simple terms; a dollar sitting idle earns nothing, a dollar on your mortgage saves you 3x that.
Shedding the financial layers
In the good times, we as consumers tend to lavish in the little bit of extra money we have. It takes us little time to find ways to attribute that money to something else – an expensive phone contract, going out, buying things online – we seem to be very good at spending.
Avoid the excess baggage and instead opt for using the money to grow your net worth. In 20 years you won’t remember what phone or bargain your snapped up online – instead you will be either reaping the benefit or suffering the consequence of a time when you could have controlled your money better.
Take a long term view
Frequently preached, rarely practised. The cost of living goes up and down – when the cost is up, we tend to become short sighted and focus solely on the now. Instead it is wise to think beyond the moment and find ways to better improve your finances over the longer term. This means making changes to your lifestyle not just temporarily, but permanently for a great goal or purpose. Time is a valuable ally when it comes to money, so a small saving now can mean a large amount of money later.