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Sorting out your finances is one of the first steps to living on the road

In the time it takes to read this sentence, about 10 people will arrive on our planet. In Australia, our population increases due to birth and immigration every minute and a half, and because we are living longer, every three minutes or so someone leaves. The discrepancy contributes to our ‘ageing’ population.

Australia is the lucky country. Not because we have boundless piles of valuable dirt or because our island status has both allowed uniqueness and given us natural immunity from many pests and diseases, but for reasons most of us take for granted such as minimal poverty, affordable health and education and freedom from tyranny. Australia gives natural and emigrated citizens the opportunity to build wealth and make their own decisions, and by age 65, more than 95% of people have fully paid off any debt associated with their primary residence (Australian Bureau of Statistics).

There are key moments in your life when you agree to pay someone thousands of dollars. That time comes for many families when purchasing somewhere to raise rug-rats. Other instances include new automobiles, share portfolios, investment property and surprisingly, lifestyle changes.

Maybe you are in the market for a pace less frantic; maybe you believe in the SKI generation and are determined to spend the sum of your working life – whatever the case, major purchases take careful consideration, planning and good advice.

There are many types of money. I don’t mean notes, coins and monopoly, but money that looks like a house, has a label on it, or is temporary. Some may belong to you, some to others, and some may only exist in a promise of the future.

They say bricks and mortar equals security. Property is a reliable investment as values rarely drop, but the downside is it’s very hard to spend a few bricks or cash in the lawn. As a result, your money may be locked up in an asset. This is called equity. In the past 18 years, the value of equity held in the average Australian household rose 62% to just below $300,000 (Australian Bureau of Statistics).

Come retirement age, many people have a big, itchy lump of money in the bank representing years of sacrifi ce. Superannuation is intended to reduce dependency on the Government age pension and be your regular income once you don’t work anymore, but the temptation to spend it on those things you did without can be overwhelming. More people face this decision than ever, as the proportion of people in Australia with Super has increased from 28% to 71% since 1974 (ABS).

Whenever something seems like a good idea (eg, taking off in an RV), someone will probably lend you money to make it happen. This is working money, or capital; rented out by the real owners to you. In turn, you can also make it work or let it waste away. Capital is a strange beast that can be allowed to go up, down or just stand still. Best keep it on a leash. Of course, there is also good, old-fashioned cash in the bank. It might be a little tied up in long-term deposits, semiavailable in managed funds or shares, or simply ‘liquid’ – money just waiting to be spent.

Recognising what type of money you have, want and need is the first step to getting your eggs in the right baskets. You shouldn’t cook your breeding eggs, and there’s no point incubating a rotten one.

To draw from the analogy, breeding eggs produce offspring, or interest. This includes super, good shares (paying dividends) and managed funds. Much of the interest produced does little more than maintain the value of the original sum, so a rate above CPI is required to draw on that interest or the principal will de-value. Regular scheduled ‘income’ withdrawals from super are not taxed if you are retired and over 60. Supplementing a pension they can maintain or achieve lifestyle, but beware of spending it now only to suffer later.

Equity is very different in that it doesn’t earn interest per se, and can be diffi cult to liquidate. While the property value may be going up, real estate can still represent a very longterm investment. Finance products exist that can ‘release’ equity and give you cash to spend. This can be a good option for people who have paid off their mortgage and wish to enjoy retirement, but don’t want to sell their house. Alternatively, equity can be freed up by downsizing. Once the kids have gone and the house seems too big, it may be time to find a smaller dwelling or a cheaper suburb. This can leave you with a sum of cash waiting to be utilised.

Most of us take on a loan at some time, but you may not be aware how many different ways banks have to play the game. Regular ‘pay back gradually with interest’ loans may not suit people with little or no income. Instead, it could suit you to get an interest-only loan with smaller, affordable payments, and the original money repaid later either from the sale of the investment or in a will agreement.

Another option that exists is to get a line of credit. A lending institution lets you spend their money on major purchases and pay back only what you use, in instalments. These products usually require regular income as security. Effectively a fancy credit card, they are best approached with caution.

Getting back to the eggs, how hungry are you? Will you be hungry later? If you binge on chocolate cake now, will you have nothing but rice tomorrow? Assuming there is enough, the fi rst call is the pantry. Liquid cash is not your friend; it sits there depreciating while interest accumulates at the rate continents drift. If you have it to use, this is the first thing to blow.

Equity is nice for building a property portfolio, but does little good when you’re sitting in a big house reading Caravan & Motorhome magazine wishing you were touring. Sale of the family home (your primary residence) does not attract Capital Gains Tax – that dreaded chunk the government takes from the sale of expensive assets – and it is exempt from the Centrelink income threshold for typically 12 months, sometimes longer. During this time, it would be feasible to purchase an RV and a smaller house, but be aware the caravan or motorhome will count on the Centrelink assets test.

Managed funds and shares are best judged on their own merits: profi tability, interest earned compared to loan rates, exit and brokerage fees. Long-term deposit rates are currently around 4% for fi ve years, so the money may be better spent on something now rather than getting fi nance.

If you have a steady income stream without working and think a loan might be your best option, there are still advantages and pitfalls to consider. Variable-rate loans give you the fl exibility of making extra payments without cost, and to take some back again if you need it. But, the rate may fluctuate, meaning higher repayments. A fixed-rate loan protects you from interest rate rises and allows you to budget accurately.

Quality of life for senior Australians is partly determined by their levels of income and wealth, so you should consider what best suits your situation and talk to your financial advisor.


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