Clients in their late 20’s, weighing up lifestyle choices versus home ownership and starting a family.
Paul and Fiona originally came to see us for some general planning advice. They were in their late 20’s, in very well-paid positions and renting in the inner suburbs of Brisbane. It was a great lifestyle, but are now considering starting a family and looking at options to purchase their first home. Paul’s parents are long-standing clients of the firm and suggested that they seek our advice.
Neither Paul nor Fiona had previously sought any form of financial advice and in fact had never really put their minds to savings, investments or even budgeting. It was therefore important to provide them with some education in these areas, but also it was vital that we made it clear that hard decisions were ahead.
We assisted the young couple in ascertaining their available, after-tax income and then to identify how that income was spent or saved. They did have some savings, but it tended to fluctuate and it became obvious that there was a great deal of impulse spending, which was a lot of fun but did not really help the bank balance. Interestingly, they did not regard themselves as big spenders and most of the spending was modest. It was just that there was a lot of it!
They identified the type of house they were considering and that gave us a gauge on an expected purchase price. We referred them to a very good finance broker who was able to give them some guidance on the level of borrowing that they would be allowed to undertake, the level at which they would avoid mortgage protection insurance and indicative monthly repayments. Armed with these figures, we again got together to look at possible strategies to achieve two immediate goals:
- Home ownership
- The ability for Fiona to remain at home for an extended period once they had their first child in a few years’ time.
The first part of the process involved a lot of discussion between us, and also between themselves, as to how their lifestyle expenditure could be reined in. They were quite surprised at the amounts being spent on non-necessities and really attributed it to the fact that they had no goals and more or less spent whatever they had. Thankfully though, they were not spending more than they earned!
Their current savings were enough to obtain a loan with a minimum deposit requirement. However, we agreed to target a deposit of at least 20%, to avoid mortgage protection insurance and to act as some buffer in the event of a period of single income. The means by which this was achieved was actually quite simple and really required only Paul and Fiona’s discipline and a relatively small sacrifice in terms of lifestyle expenditure. We agreed on the goal and then began deducting an agreed amount per fortnight from their pays. There were some areas of expenditure that were readily identified and could be reduced, but in general the strategy was merely to take the money before it could be spent. This then meant they could spend whatever was left.
Paul and Fiona actually found the goal setting quite stimulating and eventually saved considerably more than the fortnightly set amount. They gathered the deposit within 18 months and purchased their first home a few months later. Their new found attitude towards savings also allowed them to see that a single income would be manageable for a time.
During the planning process we also identified issues relating to their insurance, or lack thereof and we were able to provide them with a comprehensive solution that maximised the quality and levels of cover, and at the same time provided some taxation and cash flow benefits. In addition, we had identified that the binding nominations within their superannuation funds still nominated their respective parents. We referred them to an estate lawyer who prepared wills and enduring powers of attorney and provided us with instructions on how the superannuation and insurance benefits should be nominated upon death.
Happily Paul and Fiona have since had their first child and Fiona is working part-time as they look forward to the arrival of their second child later this year.