In this Q&A, Perth’s HLB Wealth Financial Adviser Lauren Lockhart answers a few of the next generation’s most commonly asked financial planning questions.
When is the right time to buy your first home?
There is no right or wrong time to purchase your first home, however there are a few important points to consider including:
- Are you doing it because you like the home or because there’s external pressures telling you this is a good buy?
- Do you have bank pre-approval? This takes a lot of anxiety and heartbreak out of looking for a home. Knowing you can put an offer in with confidence will increase your chances of a successful purchase.
- If you are purchasing a home with someone else are you happy to sign up to a 30-year commitment with them? Is your co-homeowner going to be a good loan candidate on paper – how will they impact your ability to get a home?
Should I build a home now as the government is offering so much assistance?
The recent government stimulus is in place to help homeowners, but it also exists to help the economy and employment. Proceed with caution when making this decision and weigh up all of the necessary variables – ultimately, it needs to be right for you personally. Once you’ve evaluated all of the aspects influenced by the government stimulus packages, don’t forget to also do your own personal due diligence.
How much should you spend on your first home?
This is a complicated answer depending on your individual circumstances, however you should factor in deposit requirements, stamp duty, settlement fees, mortgage insurance, your ability to service the loan and the home. Additionally, there are further cost considerations around home repairs, furnishings, ongoing rates and bills.
Over what time period would you like this mortgage? Lenders will provide 30 years but that’s not to say if you refinance you could extend this longer. But is that what you want? For every dollar you don’t put on your home loan that’s a dollar more they are charging you interest on.
And after all that, it’s your home. It should be something that you love and makes you feel safe. I always say that your home isn’t an investment it’s a lifestyle asset. We don’t buy it to make a profit we buy it to make memories. If you turn a profit that’s just gravy.
Should I take money out of my super to put on my home loan?
This has been a very popular question since the early release of super was introduced.
The ASX 200 dropped approximately 11% in the 2019/20 Financial Year and while many young people may not think this impacts them directly, it actually does because our super system makes up a large portion of company ownership out there. In order to give you that $10,000 cash the super fund needs to sell some of your investments (unless you were in cash). This might mean you’re selling at a low point in the market. We know that you are better off riding the ups and downs of the market for the longer term over cashing out when things seem rough.
You should also consider that superannuation is an advantageous tax environment. Your earnings in super get taxed at 15% – this is generally more attractive than the Marginal Tax Rate for those middle to high income earners.
The most common question I hear: “But I’m saving on my home loan interest.” Let’s say you use $10,000 and put it on your home loan saving you 3.5% interest. That saves you $350 per annum in interest. However if you left the funds in super that same $10,000 would need to earn you 4.5% less tax of 15% (we are using very rough calculations here) that would make you $382.50 , $32.50 more or roughly 10% more on your money.
It all comes back to what the purpose of super is for. And by its very nature its sole purpose is to save for your retirement. The option is Peter robbing Paul, but you are both Peter and Paul. So make sure you’re using your money wisely.
Should I join my friends and become a day trader?
Investing in the stock market is a whole different game from what it was 20 years ago. These days opening a trading account is as easy as opening a bank account.
There are a number of questions you should ask yourself including:
- What are your investment goals?
- What are the brokerage costs and tax implications?
- Are you holding your assets correctly?
- How does your investment strategy impact your tax planning?
- Do you have a diversification strategy?
- Have you considered your time horizon?
Why do I need personal insurance when I am young?
There are a few reasons why you should consider insurance in your earlier years.
Generally, your policy will be underwritten at application. This means that the insurer will assess you at that point in time. And why is that better to do when we are younger?
- We generally are fitter and healthier. That BMI is kept in check (a higher BMI can sometimes see multiples applied to your insurance cover).
- We haven’t suffered as many injuries or illnesses. An insurance application is a serious thing – they want to know about all those broken bones, accidents and underlying medical conditions.
You can apply a level premium to your policy at a young age. Naturally as you would expect your insurance gets more expensive as you get older. The older you are the bigger potential risk. If you want to hold insurance for your whole life you can take out cover and pay that little bit extra to avoid those age-based increases to your premium. You might start out with a pricier policy, but you will be so thankful over the longer term when your policy is much more affordable.
What do I need to think about before starting a family?
The biggest cost when raising a child isn’t necessarily the child themself. Most of the time it’s the drop from double to single income. Deciding on the return-to-work plan is important, as is how this impacts the family financially. It’s also a good time to start a budget to discover how you will manage on one income. If you do choose to drop to a single income, that income stream will be imperative, and have you considered protecting that lifeline with insurance? For the parent that takes time out from the workforce, how does this impact their future and, in particular, their super balance. Have you thought about schooling and childcare – what’s your plan for funding this?
Lauren will be hosting a series of online webinars discussing all things financial planning for those people starting out in life or looking to grow from where they are. For details relating to these webinars, check the “Events” page of the HLB Mann Judd website in the coming weeks.
This article first appeared in the Spring 2020 issue of Client Alert, which you can download here.
The information contained within this communication been provided as general information only and prepared without taking into account your financial position, objectives, and needs. You should consider its appropriateness and seek financial advice before making any financial decisions.
Lauren Lockhart is an Authorised Representative of Paragem Pty Ltd ABN 16 108 571 875, AFSL 297276.