Six financial foundations you need in place (long) before retiring

To live it up in our later years, we need to lay down some solid financial groundwork earlier in life.

This Article was first published in The Age, The Sydney Morning Herald, WA Today and the Brisbane Times.

Life’s changing fast. People are living longer, rethinking retirement, and aiming for a future filled with choices. But to live it up in our later years, we need to lay down some solid financial groundwork earlier in life.

It’s about saving smart, making savvy choices, and understanding how systems can back us up. No matter our dreams for the future, setting these foundations in place sooner rather than later is key.

When you look at people facing retirement today it’s easy to see what the important foundations are. Those who know how to budget, save and invest, own their own homes outright, have learnt to understand and use their superannuation, and only spend money they can afford on luxuries are the ones headed into retirement feeling financially secure.

So let’s spread the word about these vital basics and help everyone grasp them. With these pillars in place, we can all make the most of our longer lives and enjoy every moment.

1. Maintaining a household budget

Budgeting might seem boring to many, but those who commit to it regularly reap significant rewards.

By tracking our cost of living, trimming unnecessary expenses, and striving to create a surplus in our day-to-day lives we can invest and use our funds to achieve our lifestyle goals.

Most people learn to budget properly when they decide to save for their first mortgage. But over the years after, as salaries rise and hopefully housing values too, the need to budget tightly and diligently wanes for some, and they may not exercise these important skills again until the years before retirement.

Or they might fall out of the pattern of driving a surplus during the middle years under financial stress and resist re-evaluating their position. And we as a community don’t like to discuss the ‘boring act of budgeting’. But we should, and then we should get on and do it, updating it regularly.

2. Setting lifestyle goals within our means

Everyone lives the ‘good bits’ of their lives differently. It’s easy to covet thy neighbours’ ways of living well, wishing for fancy holidays and nice new furniture we can’t afford. In these modern easy credit times, it’s pretty easy to spend like that neighbour, even if we can’t afford to.

But fundamental to good financial management is knowing when we can afford to spend up on life’s little luxuries and when we need to buckle down and save up before we can have them. In an era of buy now, pay later, this important lesson can get lost.

So my suggestion is that we each create a lifestyle budget that is separate from our cost-of-living budgets, so we can see the difference between our needs and our wants.

Plan up to three years ahead for the one-off or regular lifestyle purchases and epic experiences you want to do, and put a price tag on each in today’s money. Work out how much you need to save for each to be viable, and only do things you can afford to.

3. Understanding compound investing and managing risk

Understanding compound interest is a game changer for financial success. Yet, this fundamental concept often gets overlooked.

Many people don’t realise that money invested over the long term at a 7 per cent compound return will double every 10 years, and money invested at a 10 per cent return will double every seven years.

Teaching this concept also underscores the need for risk management. It’s not always about chasing the highest returns but diversifying investments, considering insurance to protect against losses, and building an emergency fund.

4. Buying a home and paying it off

Buying a home isn’t just about having a place to live. It’s a cornerstone of financial stability. But with the current housing affordability crisis, owning a home seems out of reach for many.

Paying off a home offers a few unparalleled benefits: we get financial security, and we get a lower cost of living every year for the rest of our lives – because we don’t have to have the cash flow for rent.

The other thing we get, as our house grows in value over time, is a growth in our asset value that can be used to fund our lives in retirement.

Many people downsize from their family homes that are paid off later in life, and contribute some of the funds into superannuation, providing them with income generating assets for the years they need it. Others choose to stay in their homes and access their equity through a reverse mortgage.

5. Understanding and leveraging taxation benefits

Understanding the ins and outs of the tax system early in life offers numerous benefits. (More)

You can read the rest of this article here in today’s The Age, and the Sydney Morning Herald today. It is not behind their paywall, but you may need to sign into their website to read it.