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Ben Kingsley Blog post by Ben Kingsley

Money Choices

In this month’s comment I’m putting my focus on discretionary and lifestyle spending decision with a goal of just making people contemplate a little harder before making such decisions or continuing with the money choices they currently make…

Smoking: Based on research conducted by Galaxy for Pfizer in 2009, the average smoker spends $2,500 a year on smoking, which equates to $208 per month. If this is the average then over a 25 year period of smoking the average person would spend $62,500. Who knows how much more in future medical bills that hobby is going to cost them? How much if both people in the household smoked?

Gambling: CommSec, using the ABS data records believes the average Australian household spent $2292 on gambling based on 2008 data.

For the record – Probability of winning:

– Powerball is 1 in 27+ million
– Major jackpot on a poker machine is 1 in 10 Million
– Oz Lotto is 1 in 8+ million
– Tatts lotto is 2+ million
– Being killed by Lightning is 1.6+ million (just thought I’d bring it all into perspective)

Car Purchase: Buying an asset like a car is a significant purchase and must factor in essentials elements like safety, running costs and size to do the job it needs to do, but above all this lives the discretionary decisions like price, attraction, personal ego and the way in which it is going to be paid for. If debt is involved you are technically going to pay significantly more for the privilege of using that asset, even if there is a tax benefit.

My message on the car front is too often people get sold on the initial dream of what the car will do for them, when in reality it gets them and their stuff from A to B.

And what you commit out of your household income for that privilege, it has an ‘opportunity cost’ of what that money could do for you elsewhere.

Holidays: They are another high value discretionary purchasing decision. Once again the choices in the amount of money you spend each year affects your savings and future ability to build wealth and retire sooner so you can take permanent holidays. Now I’m not for minute suggesting a blanket ban on holiday spending – I strongly believe in taking your 4 weeks a year and re-charging and enjoying some quality time with people who are important in your lives, it’s just a matter of what level of spending will be involved.

Although so far I am sounding very much like the sergeant of the ‘fun police’ this comment is a reminder that households need to get an understanding of where all their money goes and what portion goes on Discretionary & lifestyle spending. It’s clear that as household income increases, so does their discretionary and lifestyle element. Take for example if I said to you – “you can go on that expensive holiday, buy that brand new car, the designer clothing, keep smoking and gambling, and enjoying the standard of living enjoyed by households that generate income of 100,000 plus a year now, but just be ready for the fact that you most likely will still be working in your late 60’s and if you continue to keep spending and either not saving some of your money or paying your debts off or investing some of this money, then get ready for enjoying a significantly altered lifestyle and income for your twilight years” – how does about half of that sound to you? Will you enjoy yourselves on $50,000 a year or less?

Opportunity Cost – Some alternatives for your household spending choices:

Let me give you some ‘very basic numbers’ to highlight to you the potential lost wealth and Income for later in life – Say you have 20 years until you wish to retire. Say based on a review of your current household spending you was able to cut back and save $8,000 a year.

Option 1: Save this money $8,000 x 20 = $160,000 in savings and that is not including the interest you would earn on this money

Option 2: Pay off Debt: Say you have a mortgage of $250,000 over 30 years at 7.1% and you could pay an extra $666 per month ($8,000 p.a) of the mortgage. Without the extra payments your interest over a 30 year period would be $354,828. With your extra monthly repayment of $666 p/m you would have saved $111,984 in early repayments and therefore saved $145,928 in interest.

Option 3: Buying an investment property to the value of $300,000 growing at 7% in value per year and yielding a 5% rent. In 20 years the value of the property would be $1,160,000 and the gross rental income would be $46,400 p.a (if increasing at 5% p.a). This income would be sufficient to pay the debt down over time and you would have a very valuable asset providing a wonderful passive income for you in later life – Just think what would happen if you bought two or three?

As I have illustrated, we are talking about hundreds of thousands of dollars in lost opportunity if you live more for today and less for tomorrow.

When we conduct one of our FREE Finance and Wealth Reviews for people who have a consultation with us, the responses can be ‘mixed’. Fortunately the majority have either had a realisation that they have a real opportunity to create greater wealth (that’s why they come and see us in the first place) or by meeting with us and we showing them their potential, they have a light bulb go off in their heads that they need to do something and we are going to help them achieve this potential.

On the other hand, there are some people we meet both professionally and socially who are in denial about what they spend, some get frustrated given they work so hard to earn their money, and some simply don’t care and live completely for today. That’s fine it’s their lives, but they need to know what the end result is…….and it’s never anything they are going to be happy about.

Our job at Empower Wealth is to take those who do actually want to do more with their money and improve the current choices they are making, so their future wealth will ensure they can retire earlier and have wealth and money to be spoilt for choices……..

Remember, knowledge is empowering – if you act on it!

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