The income we receive is like a water tank collecting rain, if we don’t turn the tap off whatever comes into the tank goes out. If we don’t have proper controls such as tap washers the water will just drain away until the tank is empty.
If we spend what we earn we will always be left with having to earn money. Relying on an inheritance from a rich uncle or parent is not a reliable strategy for securing our future. Many people have become financially secure although they do not earn large amounts of money, they succeed because they make the right choices. Equally many people get pay rise after pay rise or end up in very well paying jobs but as their income goes up their expenditure goes up. So we need a mechanism to invest part of the income we generate to fund us when we don’t any longer have that income.
Parkinson’s Law states that “Expenditure Expands to Meet the Money Available” so we need to overcome it. The Australian Treasury review of retirement income in Australia forecasts that when the first group of people who have a lifetime of superannuation guarantee contributions retires, that of those on average weekly earnings (AWOTE) 54% of them will be in receipt of some form of age pension. It further states that those 54% will be receiving 88.8% of the maximum age pension. Given that retirement age can be changed and pension ages look like they’re being increased and not reduced it makes for a scary picture.
10 years ago I had a financial planning client who told me that his living expenses were $250,000. I was quite surprised but put the figure in his plan. Six months later he came to me for his first review and he told me that the estimate of $250,000 was incorrect. He then staggered me completely when he said the figure would be nearer to $350,000 per year. He was working in a very highly paid job but was not really accumulating many assets.
Compare this to a receptionist earning $35,000 a year at the same time who owned a rental property and consulted me regarding her plan to buy a second one. She was harnessing her cash flow and yet was quite happy with her life style.
So what should we do if we have this problem?
- Get our expenditure under control.
- Retain our existing lifestyle as we receive more income
- Save or invest the surplus we generate
- Get Advice!