Be debt free when you leave work
The engine that powers the lifestyle you want in retirement.
09 May 2018
It’s your net worth after deducting your debts that becomes the engine that powers the lifestyle you want in retirement.
So if you have less debt, your net worth will be greater. There are two types of debt - good debt and bad debt. The good debt helps you grow your investment assets or your business faster and you can claim a tax deduction on the interest payments associated with the loan. Bad debt is incurred for lifestyle reasons and you can’t claim a tax deduction for it.
So the subject of debt management can become a bit of a 'high wire' balancing act! You better make sure there is a safety net available to catch you if you fall!
Now you need to have paid off the bad debt associated with your home by the time you retire, specifically and practically long before you retire. How can you grow your wealth and have the lifestyle you want in retirement if the main fuel that goes into generating that wealth – your hard earned income - is being consumed in paying off debt? Alternatively if you reach retirement and you haven’t paid off your home loan, you’ll find yourself diverting valuable retirement funds or associated income steams into paying off your home loan and then you’re less likely to have the lifestyle you want.
Now you can pay off your home loan sooner, without extra payments by adopting well managed programs based on using various line of credit mortgage loans. Check these out with your financial planner, mortgage provider or accountant. Of course even before retirement, you’ll be wrestling with the issue of whether to divert spare funds into your retirement savings or paying off your home loan debt. Preference should be given to the later use of your funds, although it does depend on your personal situation.
To consume or not to consume – that is the questionIf you want to achieve the appropriate lifestyle in retirement, you’ll have to make some tough decisions along the way. You’ll need to curb inappropriate spending and direct those hard earned funds into paying off your home loan and saving for retirement. While this won’t seem to be the most exciting thing to do with your money in the short term, it will pay considerable dividends in the longer term.
Think twice before over committing to items that depreciate rapidly such as electronic equipment, household electrical items or cars, particularly if you’re buying at the higher end of the price range. You can waste a lot of your hard earned dollars on these items. Don’t regret that spending spree one month, three or 12 months down the track! Have a rule that if you are in doubt, don't spend. If you have the money in the bank you can always buy it tomorrow or in six months’ time. To make the decision process a little easier, come up with a rough rule of thumb so it’s clear what decision you’re actually making – eg for every $1,000 I spend inappropriately, I’m delaying my retirement by 1 month.
Invest, invest, investEvery dollar that you save is a dollar than can be invested and that dollar invested can grow dramatically over a lifetime.
To help you manage what is happening in this regard, there is some great budget software around that can make the job much less tedious. This budget will help you see the big picture, prioritise your spending into fixed costs, and discretionary and non- discretionary items, highlight high expenditure months and low expenditure months and show you how much of your hard earned income you can afford to divert into a long term savings plan.
These suggestions are pretty simple, but hopefully they give you the basic idea. If you would like some professional help with budgets and wealth creation, you could contact a financial planner.
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