What I personally did with my finances after I bought my first home
When it comes to financial planning at Bounce Financial, we are a complete open book about our own personal strategies.
Everyone is at a different point in their financial journey but sometimes, understanding how others are approaching their financial goals can you give you ideas of what suits you.
So what are the things I did after I bought my first home to progress my financial situation? Here are the top 5 things I did.
No 1: We bought an apartment
As a general rule, your first home is not meant to be your ‘forever’ home. It is a starting home.
We always intended to live in a nice big house in a beautiful suburb, but buying this straight away wasn’t consistent with my financial plan.
Instead, we bought a small 2 bedroom apartment close to town because that is what suited our needs at the time.
So why did we do this? Let’s do some maths!
- We had $80,000 saved for our home and bought a $300,000 apartment. This meant we had to borrow $220,000.
- The interest rate was about 4.5% at this time (I can’t remember the exact amount) and the loan length was 25 years.
- We lived there for a bit over 4 years.
We also sold it for $30,000 more than we bought it for which was great. But here is where the real savings were. In the 4 years we lived there:
- We paid about $58,704 in repayments.
- Of this approximately $37,348 was interest.
It is important to clarify that interest is dead money. It’s a bit like rent money, but in this case, you are ‘renting’ money to buy your house.
Now if we had bought a $600,000 house like we wanted (and borrowed $520,000), we would have:
- Paid about $138,768 in repayments.
- Of this approximately $88,290 would be interest (i.e. dead money).
The amount of extra money we had by not paying the higher amount of interest was $50,942.
When we were ready to buy our house after 4 years, we had an additional $50,000 to put towards it that wasn’t lost to the bank. This was in addition to the extra savings we had anyway.
Did we want the house for $600,000? Yes. But for $50,000 we were willing to wait 4 years. The bonus is we not only had 4 years more of saving, we had $80,000 additional money which was made up of the interest savings plus the additional sale price.
No 2: I increased my contributions to super
The purchase of my first house coincided with my first job as a Lawyer and a subsequent bump in income. This bump however meant that my marginal tax rate was 37%.
As a person who doesn’t love paying tax, I increased my contributions to super by $5,000 each year. This $5,000 is taxed at 15% and not 37%.
The total tax saving straight away is $1,100 per year.
But the tax saving doesn’t stop there. This money is invested in my super and each dollar earned is only taxed at 15% (and not 37%). This will be paying dividends for years to come.
No 3: I took out insurance
Now that I had a mortgage, I knew I needed to take my insurance seriously. I applied for insurance to protect against:
- Total and Permanent Disability (if I am permanently disabled and unable to work)
- Income Protection Insurance (if I can’t work for a shorter period); and
- Trauma Insurance (if something traumatic happened).
By applying for this insurance, I was able to ‘lock in’ the terms so that they can’t change without my permission.
I also applied for ‘Level’ premiums which meant that my premiums didn’t increase with age the same way they would if they were ‘Stepped’. Because I was young (26 years old), I knew this would work out for me in the long term.
It’s my sincere hope that my insurance is a WASTE of money. If it is, it means I lived a long and healthy life.
No 4: I started investing
I split my savings between two places:
- Paying down my homeloan quicker; and
I knew that each dollar I paid off my homeloan reduced my interest payable by 4.5% (my interest rate on my home loan at the time). At the same time though, I wanted to start investing to hopefully deliver a better return.
My investments have changed a couple of times in that time but my current investment structure has delivered just under a 10% return each year since. A LOT better than 4.5%.
If I had just paid off my house only, I wouldn’t have got that extra money to put towards my financial goals.
By splitting my savings between my home loan and investments, I was able to have the safety net of paying down my house whilst chasing the returns of investment.
No 5: I worked out my goals
My goals when I was young were far easier to describe. I wanted to:
- Go to university- check
- Live in London and backpack through Europe- check
- Buy a house- check
Now that I was on the path to financial success, I needed to think about what financial success actually meant to me.
These sorts of goals are far harder to define as you are essentially planning your whole life.
I knew some things about me. I am a passionate person and anything I do with my life, I want to add value to the world. I also knew that I wanted to be in control of my own life, I wanted to call the shots.
Cara had similar reasons but together we realised we wanted the same thing, to start a business. That business was of course, Bounce Financial!
Once you’ve worked out your goal, it’s a lot easier to make a plan to get there. For us, that was:
- Investing and paying down our house as much as possible to prepare for starting the business
- Cara leaving her job (and her comfortable salary)
- Me continuing in my job until we were in a comfortable position for me to join the business.
Your goals are going to be different. It may be to start a business, but it might be to do renovations, travel the world, retire early or do a year campervan trip around Australia. That’s the beauty of goals, only you know what will bring you true happiness.
Clarifying your goals means you can clarify your financial plan. When things get hard (and they do), you’ll always know why you are doing it.
As always if you have any questions, please don’t hesitate to reach out.
This post is from our resident Financial Planner Ben Brett, check out his details in the About Us section.
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