posted in: Building Wealth

Am I stuck in the rat race?


Here’s a common scenario we see playing out all over Sydney:

A young family lives in their own home in an in-demand Sydney suburb. Both parents have great jobs and are earning good money. They should be living the dream right? Not quite. 

Desperate to upgrade to accommodate their growing family, they purchased a home they could only just afford during an upswing in the property market. They now have a substantial mortgage that eats up more than a third of their household income. The house probably needs a renovation but they haven’t been able to afford it yet. 

Their jobs require them to work long hours which means putting their two kids into daycare 3-5 days a week. They don’t qualify for the childcare subsidy so the costs of childcare end up being more than $50,000 a year. They’re thinking about sending their kids to a private primary school in order to secure them a tightly held place in the high school. For two kids that will cost over $40,000 a year and will grow to $50,000 a year (or a lot more) once their kids reach high school.

They own two cars, which they purchased on finance. They go on holidays a couple times a year to the South Coast or South East Queensland. They will occasionally enjoy an expensive meal at a restaurant. While they don’t live frugal lives, they don’t live particularly extravagantly either. However, every month they are spending everything they earn, with nothing left to show for it. What’s going on? 

Why can’t I get ahead? 

We hear stories like this one constantly. Many Sydneysiders who are earning good money feel like they don’t have enough to show for it. If this sounds like you, then trust us you’re not alone!

While it may seem that this family is not able to save or accumulate wealth due to their financial choices, the truth is that’s only one part of the story. Sure, they could opt for public schooling, buy a cheaper car or not go on holiday, but this wouldn’t address the main issue. 

The biggest obstacle to this family building wealth is the fact that exploding property prices in Sydney and high costs of living are outpacing wage growth. 

$3 million homes to become the norm 

Sydney’s property prices just keep going up. By the end of the year, it’s predicted 60 Sydney suburbs will have a median house price of $3 million. And we’re not talking about prestigious suburbs like Vaucluse or Mosman, we’re talking about suburbs like Seaforth, Lindfield, Curl Curl or Naremburn. 

For many Sydneysiders, buying a home in Sydney will simply become unaffordable and unattainable. For those that do stretch themselves, they’ll be burdened with a very large mortgage debt that will become even more of a burden once interest rates eventually rise.

What’s the good news?

The good news for many homeowners and parents is that your financial life usually gets easier over time. At some stage your kids will get older and if you’re not planning to put them through private schooling, those expensive day care costs will be replaced with much more manageable school fees. 

Whilst we haven’t seen too much wage growth in recent years, many experts believe the extra cash injected into the economy during COVID-19 will ultimately lead to an increase in inflation, as companies compete for qualified staff in an ever tightening job market. This increased competition would normally result in wage growth, which has the net effect of reducing the “real impact” of your debt. 

Hanging onto that expensive Sydney home may seem like a stretch for many, however if you can manage it you’re likely to end up with a pretty substantial asset that can be used as a tool for funding your future retirement when the kids have flown the nest and it’s time to downsize!

How can you get ahead?

So, what things can you do to get ahead during this period without overloading your cash flow?

Regularly review your interest rates

With interest rates falling significantly over the last few years, one of the first things borrowers can do to ease their cash flow burden is to ensure they have a competitive interest rate. The current difference in repayments between a 2% or 3% interest rate when you are borrowing $2,000,000 is approx. $1,000 per month.

Access equity to purchase a cash flow positive/neutral investment property

With prices in Sydney (and other regions) rising at record speeds, it could be possible that you have additional equity in your home to access for investment. Borrowing additional funds for an investment into shares or an investment property can be a great way to build wealth. 

Salary sacrifice extra super contributions

With interest rates so low, many investment properties are close to break even or cash flow positive, even when borrowing the deposit and purchase costs. If there is a little extra room each month, then salary sacrificing some income into your super can be a great way to build wealth, as the additional tax advantages of super can have a significant impact on your long-term savings. 

If you own your own home, don’t forget that just paying off the mortgage is actually a form of savings. While it may feel like you’re standing still, paying down that debt while accruing equity is actually building wealth. 

Can’t afford the city home yet – maybe it’s time to consider rentvesting?

If buying a home in Sydney is unattainable, renting a home in Sydney while investing somewhere else (known as rentvesting) is one option you may want to consider. Ultimately you’re going to need a home and an investment portfolio to get ahead, so if you start with the portfolio first, you can leverage that in the future to one day purchase a home. 

Want to access the right financial advice to get ahead? Get in touch with us for a free consultation on your financial goals and how to achieve them. 

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