Tag Archives: Debt
How to help your children with buying property
By Robert Wright /July 16,2021/
With property prices rising at a record rate in many cities across Australia, the ‘bank of mum and dad’ is playing a bigger role than ever as many parents feel pressure to assist their children in buying a home.
For many Australians, home ownership is not just seen as the great Australian dream, but it also represents financial security and an important step in adulthood.
However, rapidly escalating prices, particularly in highly-desirable capital cities such as Sydney and Melbourne, has put that first step on to the property ladder out of reach for many young people. This in turn has led to many children turning to their parents for assistance.
According to the AFR, parental contributions are averaging more than $89,000, an increase of nearly 20 per cent in the past 12 months. In fact, the ‘bank of mum and dad’ has about $34 billion in loans, making it the nation’s ninth-largest residential mortgage lender.
For parents who want to help their children into home ownership, there are a number of strategies and pathways to consider.
Contributing to a deposit
Most lenders recommend prospective home buyers have 20% of their loan available as a deposit, and contributing to this deposit is often what first comes to mind when parents think of how they can help their children, as scraping together a deposit is generally considered the most difficult step in buying a first home.
If you are contributing a cash amount, make sure you have clear discussions with your children about any expectations related to your contribution – for instance, if you are making the contribution in lieu of leaving them money in your will, make this very clear and don’t hesitate to put it in writing, especially if you are doing this for one child but not others.
Acting as guarantor
A guarantor home loan is when someone, in this case a parent, offers up part of their home equity as security to top up the buyer’s cash deposit.
It means the buyer only needs a small deposit or sometimes none at all, and avoids paying costly lender’s mortgage insurance (LMI).
It’s crucial that you only agree to act as guarantor if you have full confidence in your child’s ability to make their loan repayments. If they default, you will be liable and your own home may be at risk.
Providing a loan
Whether through an official loan provider or a private agreement between parent and child, you may be in a position to loan your children the money they need to buy a home or for their deposit.
Keep in mind that this assumes they will be able to make their official home repayments as well as paying back the initial loan, and it is important to have honest discussions that clarify how they will manage this, and a timeframe for repayment.
Always put your well-being first
It may sound selfish and like it goes against what we’re told as parents, but it is crucial that older Australians put their own financial security first.
If you are simply not in a position to assist your child, do not feel pressured to put your financial wellbeing at risk in order to help them, especially if you have doubts about their ability to manage the repayments and responsibility of a home loan.
In this case, have a frank discussion with them about your will and what you will be able to provide for them after you have passed. You can also direct them to seek professional financial advice from your adviser which may help them understand how they can work within their own financial limits to move towards home ownership without your assistance.
Source: Money & Life
How to save for retirement in your 40s
By Robert Wright /March 10,2021/
Let’s start with the good news: studies show that your income peaks between the ages of 45 and 54. You’ll potentially have more money than ever – but you may also have unexpected or unwelcome expenses, like divorce. At this age you might also put retirement planning on the backburner in favour of more pressing financial commitments, such as your mortgage and kids’ school fees. Use these potential life changes as the impetus to re-evaluate your assets and income, and look at how you can maximise savings for your retirement.
In your 40s, retirement age is still some 20 years away and, while that seems like plenty of time, your decisions now can help secure your financial future. Read on to find out how to save for retirement in your 40s.
Calculate how much you’ll need for retirement
According to the Association of Superannuation Funds of Australia, by the time you reach 49 you’ll have between around $87,500 and $145,000 in your super account. The same group estimates singles will need retirement savings of $545,000 for a comfortable retirement, while couples will need combined retirement savings of $640,000. Are you on track to getting there in the next couple of decades?
Set realistic financial goals
While your financial goals in your 20s and 30s may have been idealistic, as you get closer to retirement, they should become realistic. It’s time to develop a clear plan for your savings, with achievable short, mid and long-term targets in working towards your overall retirement goal.
Live within your means
Your 40s are typically peak earning years, but with Australia in the grip of a recession, many things aren’t typical right now. One thing that’s changed is where we do our work. At the start of the coronavirus epidemic, more than 10.5 million Aussies swiftly transitioned to working from home, and many people are yet to go back to the workplace. While there might have been some initial expenses to set up a suitable home workspace, there’s also a reduction in day-to-day costs like commuting. Consider funnelling any of this cash into your savings instead, to actively save for your retirement in your 40s
Become more mindful around spending on big-ticket items as well – before a splurge, try taking a day (or a week) to give yourself time to think about how much you really need the item. You’ll be surprised at how often you decide it’s not essential to your life, and the money you save can be added to your retirement savings instead.
Review your investments
Your super might be ticking along, but what about other investments? It’s not too late to start saving and investing. Work out what style of investor you are so you have a better understanding of how comfortable you are with risk. Then talk to a financial adviser about creating a portfolio that suits you, which might include property, shares and other investment classes.
Aim to be debt free
Entering retirement with debt means juggling repayments with a high interest rate, which will eat into your retirement income.
To enter retirement debt free, look at paying off your home loan before you retire. Preparing for retirement in your 40s might mean getting a better deal on interest rates or creating a budget that allows you to make extra contributions to your mortgage, above your minimum monthly repayments.
Make sure you pay off your credit card balance in full each month so you don’t accumulate interest. Be cautious about borrowing money that you won’t be able to pay off in a short period of time.
Update your insurance
For many people, COVID-19 has been a strong reminder of how much we value good health and wellbeing – and how quickly things can change. Having the right kind of insurance can help create peace of mind when you need it.
Review your private health insurance to make sure it’s still right for your needs, particularly if your circumstances have changed or you have a growing family. Income protection and life insurance help to protect you and your family if you can’t work due to injury or illness, so you can continue to pay the bills without dipping into your savings.
Plan for your kids’ futures
Your kids mean the world to you – we get it. But their education doesn’t have to come at the expense of your retirement. As part of your retirement planning, consider setting up a separate savings account to fund things like your kids’ school and university fees, so you don’t have to dip into your retirement fund for their education.
Show your children how and why you’re cutting back on discretionary spending (meals out, trips to the movies) to make their long-term goals (like getting a job) a priority. You’re never too young to develop a healthy understanding of finances and budgeting.
Source: AMP
How to start saving for your future in your 20s
By Robert Wright /December 04,2020/
If you’re in your 20s, chances are that life could feel like a bit of a rollercoaster right now. The economic fallout of the coronavirus (COVID-19) may have knocked your personal finances for six and at the same time, you could be juggling new expenses and experiences for the first time, such as moving out of home and starting your first full-time job. Learning to juggle competing financial priorities and save for the future is essential.
While these lessons may be confronting at the moment, they can also teach valuable skills that your future self will thank you for. If you do things right in your 20s, you can lay the foundations for a solid financial future and set yourself up for life. Here’s how to put some sound plans in place to give yourself more choices about how you live your life in the years ahead.
Get budgeting
It might seem obvious but getting in the habit of budgeting when you’re young is one of the best ways to boost your future financial wellbeing.
Start by tracking what money you have coming in (your income) and going out (your expenses). It’s important to understand where your money is going and what proportion you’re spending on essentials, like rent, food and utilities, and non-essentials, like entertainment and clothes.
Practise mindful spending
No matter what your financial situation is at the moment, this is an ideal time to learn savvy spending techniques. Practising mindful spending is an easy way to ‘trick yourself’ into saving money. And when you do need to buy a big-ticket item, do your research, shop around and where possible, look out for seasonal sales to help stretch your hard-earned dollars further.
Compound your interest
When you’re in your 20s, your budget is usually pretty tight and there are plenty of other demands on your income. But if you can spare a few dollars from your pay, it can make a big difference later on.
By starting to save in your 20s, you have a great opportunity to maximise the growth potential of compound interest. This means that you not only earn interest on whatever funds you deposit into your savings account, but you also earn interest on that interest. It’s extra money – without the extra effort.
For example, if you begin with $100 in an account earning 2% interest a month, and deposit just $10 into the account every month, in 10 years you’ll have $1,449 in the account – $149 of that pure interest. If you keep doing that for your entire career, say 50 years, when you retire, you’ll have $10,568. Of that, $4,468 – almost half – is pure interest.
Watch your super grow
Once you earn over $450 a month, superannuation is compulsory in Australia for most employees, which typically means you’re in the fortunate position of being able to start planning for your retirement as soon as you get your first job – whether full-time, part-time or casual.
So, rather than thinking of super as a burden, think of it as an easy way to save for retirement in your 20s. It can be tax effective and harnesses the benefits of compound savings.
If you withdrew your super early
If you’ve been affected financially by the coronavirus (COVID-19), you may have withdrawn some of your super early, under the government’s early super access scheme.
While it might have helped in the short term, it’s important to consider the long-term implications of withdrawing any money from your super. Just as compound interest works to grow your retirement savings over time, the reverse is also true, and any money that was withdrawn this year could be worth much more by the time you’re ready to retire.
If you did withdraw some of your super early, think about whether you can commit to a plan for paying it back, once you’re back on your feet. You can do this by making personal contributions to your super.
Ditch personal loans and credit card debt
Falling into credit card debt at an early age can quickly spiral into an unhealthy financial future. If you do have any spare cash at the moment, it may be a good idea to prioritise debt repayments.
Write down all the money you owe, then rank each debt in terms of the interest rate on the amount. Payday loans and credit cards generally have higher interest rates, so you should prioritise paying them off first.
Learn to invest wisely
While you’re in your 20s, retirement isn’t just around the corner, which means you have more flexibility with your finances than someone in their 60s who may be planning to leave the workforce in a few years.
With fewer financial responsibilities, you may be in a position to take a few more risks with your investments – the thinking being that if things don’t work out, you have time to fix them.
Start early and consider talking to a financial adviser about choosing a mix of investments that will bring you gains you feel comfortable with, given your financial investment style.
Source: AMP
How is your credit score affected by COVID-19?
By Robert Wright /August 28,2020/
If you’re one of the many Australians financially impacted by COVID-19, who have deferred $218 billion worth of payments this year – fear not. Your credit score is unlikely to be affected by payment deferrals or mortgage holidays due to the current state of the world.
While that’s good news, it’s still important to maintain a high credit score by understanding how it’s calculated and what you can do to maintain it in future.
So, what is a credit score?
A credit score is a number between zero and 1200 that reflects how much money you have borrowed, the way you use credit and your history paying off any loans and credit cards. This is calculated based on many sources of information including:
- Your personal details like your age, income and living arrangements.
- Financial information like how many loans and credit cards you have.
- Your bill paying history for expenses like energy and phone bills.
While your credit score is a record of positive information, such as your track record making repayments on time and in full, it also encompasses negative information such as late payments, court adjudications, bankruptcies and insolvencies.
All in all, the higher the score, the better and the more likely lenders will be to approve loan or credit card applications you might make. The lower the score, the riskier you will be perceived by lenders, making them less inclined to approve your application for a loan, which is why having a high credit score is important.
How is it calculated?
Credit bureau are responsible for consumers’ credit scores, which are calculated across the bands below:
- Excellent: 841 – 1,200
- Very good: 756 – 840
- Good: 666 – 755
- Average: 506 – 665
- Below average: 0 – 505
What is a credit report?
A credit report sits alongside your numeric credit score and contains all the information used to determine that number. The report includes detailed information about the way you handle credit, such as your repayment history, as well as any defaults or overdue payments. It also encompasses information about your active loans and credit cards such as their value and repayment amounts.
Be aware your credit report will include a record of any defaults if you miss a payment valued at $150 or more that’s overdue for more than 60 days.
What’s it used for?
Banks and other financial institutions check your credit score and your credit report to see how likely you are to be able to make your repayments on new loans or credit cards for which you apply. Banks, telcos and energy companies also check this information every time you apply for credit with them.
What might cause your credit score to drop?
There are a range of reasons your credit score could drop, such as when you pay off a loan or cancel a credit card. While this might be confusing, this is because lenders have less information to assess how reliable you are at paying off debts or assessing loan applications.
Your credit score can also drop when you successfully take out new credit. This is because the average ‘age’ of your debt drops with the new loan. Over time, when lenders see you making regular payments on your new card or loan, your credit score should increase once more. Your credit score will also drop if you miss a payment, are routinely late making payments, or, if you go bankrupt.
How can I improve my credit score?
There are lots of steps to take to improve your credit score, including:
Pay your bills and loan repayments on time, and, in full. It’s an idea to set up direct debits so all of your obligations are automatically paid. This could help minimise the risk of missing a repayment and having this affect your credit score.
Don’t apply for too many new lines of credit, for instance multiple credit cards, at the same time. Lenders can take this as a sign you’re experiencing a cash flow crisis and need access to money fast, which can put you in the higher-risk category as a borrower.
Lower your credit limit. Lenders like to see borrowers using credit responsibly by paying off their repayments on time, and, in full.
Will my credit score be affected if I have deferred my mortgage repayments?
Banks have allowed borrowers who have been affected by COVID-19 shutdowns to defer loan and mortgage repayments for up to six months. Rest assured your credit score will not be affected if you have deferred your loan repayments.
This means that your credit report will not include a record that you have missed a payment as a result of deferring your repayments due to COVID-19. However, your credit score may be impacted if you have missed a payment on a loan or credit card for other reasons.
What should I do if I think my credit score is wrong?
You can take steps to correct your credit score if you think it’s wrong. Contact the credit reporting agencies to amend details such as your name and address. If the error involves incorrect defaults or information on your file that is a result of identity theft, contact your credit provider.
Source: BT