23 February 2014

How not to live off 80k

I don't really understand people who are hopeless with money, but then I don't understand a lot of people (like Greens voters)

Jenni Ryall is a News writer on a 12 week course to stop being a financial disaster - stop getting taxis everywhere, kick the $10 a day coffee habit etc etc - this week's lesson is (extremely crude) budgeting, or at least a cash flow statement

Everyone needs a budget, doesn't have to be written down, but it helps - my concern with Jenni's article is that she thinks 'Jim's' fictional budget below is a way of 'dominating life'How your graph should look: Jim’s yearly expenses.
So, on a post-tax income of 60k (which is roughly an above average salary of 80k) 'Jim' has 1k in assets at the end of the year - quite possibly to be used for the 'yay-no-debt' party

Now, if you were doing this off a 40k salary, which is just above min wage, then that would be a reasonable result, particularly if you were working towards a pay rise, but 80k is a decent salary to most Australians, it's more than about 80% of all ozzies earn and therefore may represent the peak earning capacity of a lot of people (source) - Jim is buggered if he loses his job (is he a journalist too??), probably needs debt to go on a holiday and is likely facing work til he's 70 (or 80 at the current rate of change) and will be reliant on his minimum super contributions and will probably rely on the pension (but then again...YOLO!)

Not fun in my view, it always amazes me the amount of 30-somethings that simply piss money up the wall, mostly in the form of rent - why is Jim spending over 25k of a single income on rent? Jim likes 3 bedrooms to himself? My whole house would get less than that on the rental market

Maybe he's a sole breadwinner of a family of 4, maybe, but still, 25k is about the yearly cost of interest on a $500k mortgage at current rates - even with the current market, get your own unit with a 3 or 400k mortgage and you're not only saving on your expenses, you're building an asset with excellent growth prospects - why are you surrending more than you need to someone else's income stream?

Secondly, this guy spends over $7000 on a car loan, which could have a 3 or 5 year term and you would hope, therefore, was a new car, and yet he spends $1000 on maintenance per year

Want to know how much I spent on maintaining my 13 year old car last year? - $1300, that was for a major scheduled work, obviously as the car gets older I am exposed to greater likely costs, but such costs are weighed against the utility of the vehicle and the savings I get from not needing to buy a car (which is basically a huge expense, not a store of wealth)

Now while petrol is obviously varied on circumstances, for some reason this guy pays over $2500 on insurance and CTP, more than 50% what I paid last year, so it must be a nice car, that apparently is out of warranty and breaks down a fair bit (Alfa??), he's spending about 15% of his income just on owning the car, the petrol on top of that takes it to over 20%

Combine with the rent, the two basic items of his shelter and car cost him 62% of his income - this is a moderately high income earner and we haven't even got to food yet...

'Transport' bizarrely is again nearly $2k, this is possibly related to Jenni's taxis, or could be the train/bus/tram, but again, the obvious question is raised that why would you spend so much on a car when other forms of transport cost you so much?

So we're now left with about 35% of Jim's income to pay for stuff that isn't related to going from A to B or keeping a roof over his head - food is pretty reasonable, in fact most of his other costs are pretty good - even the clothing budget, probably because he's giving over half of his income to his landlord and the bank

The major exception is entertainment costs - Jenni apparently spends 25% of her income on this, Jim spends $125 every week and this is only 10% so god knows what she is doing

To be honest this is a reasonable figure to work with, budgeting shouldn't be about cutting back on the enjoyable parts of life - maybe try limiting yourself to $100 a week, but really, the rent and car costs should be the red flags

Likewise, the $7 a day coffee habit and $100 in bank fees are simply waste, drop them

If Jim was to spend $7000 on a used car this year (not great, but remember he has no money, so deal with it) next year he would instantly have $7000 to invest, along with savings from using the cheap work coffee and kicking pointless fees he'd be close to 10k a year surplus with minimal fuss - he could then save for a deposit, invest in property, cut his rent expenses substantially and start increasing equity

Alternatively, do what my single mates do and share a rental - only a sole-income family man would need to pay that much himself, instant 15k saving right there - he could even buy the unit, let it out to another 2 people and let them pay his mortgage...

The truth is, you really only need about 30k or 40k to 'live' - I think that's where the poverty line was drawn in Australia last time I checked, but a lot of 'wealthy' people spend so much on flash cars, eating out and general crap that the lowly shop floor workers are actually worth more - I happened to see my boss' savings target recently, and I'm worth many times more (he's older, we're both DINKs) - simply because the gap between my income and expenses is so much bigger than his, despite him earning maybe 30% more than me

As for this daft series, the fact that the whole purpose is to get you to spend $36 on a 12-week frugality course should ring alarm bells, creating wealth really is quite easy:

If you really are hopeless - put your payslip into 3 (or more accounts), set your budget and your savings goals, then put the money for your bills and essentials in one, 'fun' money in the other, and a set amount in the other as savings - treat that last amount as if you don't even have it, live off the reduced income and it does the work for you