The Cost of Spending

One of the fundamental principles of Empower Wealth’s Money Planning philosophy is that you should get your money to work as hard as possible for you.  In our previous newsletter, we looked at one approach to get your money working for you, by using an Offset Account to reduce the amount of Interest that you have to pay on your Mortgage.

This approach will ensure that every dollar you can save is reducing the amount of Interest that you have to pay, meaning that your debt will be eliminated more quickly, and you’ll end up with more money in your pocket.

But life isn’t just about saving for the future; it’s also about enjoying the lifestyle of your choice, now and in the future.  Along the way, this means spending money to enjoy the lifestyle that you want now, while being aware that every dollar that you spend now is one dollar less that you’ll have to spend in the future.

Or so you might think!  What if it turned out that every dollar you spend now equates to five dollars less that you’ll have to spend in the future?

How does this work?

Let’s imagine that you want to purchase a new television for $1,000.  To do this, you will need to take $1,000 from your Offset Account (remembering that every spare dollar you have is being kept in this account to save interest).  If the associated mortgage has twenty three years left to run, that extra $1,000 in the Offset Account would have saved you nearly $5,000 in interest by the time the mortgage is paid off.  Of course, if you withdraw it now, it isn’t going to save you that interest.  So your choice is to spend the $1,000 now, or to have $5,000 to spend in twenty three years time.

To make a fair comparison, we need to allow for the fact that inflation is reducing the purchasing power of money each year, meaning that the amount that we can buy for a dollar in twenty three years time can be expected to be roughly half what we could buy today^[1].  So the real comparison is whether you would prefer to be able to buy $1,000 worth of goods now, or to be able to buy $2,500 worth of goods ( at today’s prices ) in twenty three years time.

As we’ve already pointed out, life isn’t just about saving for the future; you also need to spend money to enjoy the lifestyle that you want now.

But the reality is that with every purchase there is a true cost to your wealth, so unless you understand this true cost of spending in terms of its impact on your future wealth, how can you really make an informed decision about whether that purchase represents value for money.  Furthermore, whether you’re getting the balance right between spending for today and saving for tomorrow.

The fact is that when we take a snapshot of Australian’s level of investments and savings the reality is that the vast majority of Australia, once they stop working are going to experience a significant reduction in income, which will result in a significant reduction in their living standard and quality of life they have enjoyed up until that point in their lives, if they don’t sell down their assets to supplement their incomes.

Empower Wealth’s Personal Wealth Management Program not only includes recommended Account Structures and money management techniques to enable you to get the best possible return from your money and reduce the amount of Interest that you pay, it also includes a sophisticated Wealth Projection Simulator which allows you to see the effect of financial decisions, from the purchase of a new television to the purchase of a new house, and anything in between, to give you the numbers you need to make an informed decision about your financial future.

If you would be interested in seeing how these tools and techniques could be applied to your own personal financial situation, please come and see us for a free one hour consultation by registering at our website or just give us a call.

[1] assuming an average Inflation Rate of 3.0% per year