Understanding Spending, Budgeting and Debt Management
How retirement can change your spending patterns
Do you know how much you really spend now and how your spending might change after work? If you don’t, you’re not alone. Around 86% of the Australian population don’t know how much money they’re spending every month. And 82% don’t know what their mortgage rate is. 1
With COVID-19 having a huge impact on many people’s day-to-day finances, it’s never been more important to budget well and manage your debt wisely.
Understanding what things really cost in retirement is crucial to developing a financial plan now that can help you build a smooth transition into life after work. While how much you need is unique to your goals, your interests and your lifestyle, there are useful benchmarks to help you understand what you may spend, and we’ve included these in this section.
The Association of Superannuation Funds of Australia (ASFA) has put together detailed budgets of what Aussies typically spend for a modest or comfortable retirement that are a useful starting point.
1 UBank Know Your Numbers Index, 2018
Spending and the retirement smile
Your spending in retirement isn’t constant over time. Retirement evolves; so do your costs. Spending starts high – as retirees travel and pursue hobbies – but then declines until later in life when rising health care costs kick in. It’s called ‘the retirement smile’ and can help you ensure you have the right level of funds at different phases of your retirement.
Planning for the unexpected
If you’ve been made redundant – it’s time to plan
Even though redundancies are often part of life, being told your role has become redundant can still leave you feeling blindsided. These key steps may help you make the best use of any redundancy funds you receive to help support your future, including:
Understanding your redundancy payment.
Reviewing your options.
Meeting your immediate needs.
Dealing with your redundancy package.
Moving towards retirement.
“With COVID-19 having a huge impact on many people’s day-to- day finances, it’s never been more important to budget well and manage your debt wisely.”
What will you spend and what will you need?
We’ve put together some strategies for you to consider that may help you manage your spending and debt.
Reduce/eliminate debt
The sooner you reduce your debt, the less interest you pay and the more you can potentially save and invest for retirement.
You should generally try to avoid carrying debt into retirement because, usually, the interest rate on debt erodes your retirement savings. Here are a few things you can consider doing:
Start reducing the highest interest rate balances first, such as personal loans or credit cards.
If you’re still working, look for a lower interest rate provider and increase your payments to be made more regularly – for example, fortnightly if you currently make payments monthly. See if you can pay off more than the minimum required payment too.
If you’re retired, consider which savings would be best used to pay off debt as quickly as possible, starting with the debt with the highest interest rate.
Please note that some loans don’t allow additional repayments to be made. You should check with your loan provider whether additional repayments are allowed and whether any penalties apply.
Note: There are all sorts of risks and factors to consider when it comes to spending, debt management and budgeting. Consult a professional if you need to.
Track your spending and make a budget
If you know where your money is going, you’ll know how to slow your spending and prioritise your choices. Seeing a picture of where the money is going can give you a surprising view of reality.
Ask yourself if you really need to buy that item or if it will slow your progress towards your goals. Then you can make a budget you can realistically stick to.
Put savings away before your discretionary spending
Saving should be the first thing you consider after making your necessary debt repayments, not the last thing you do after spending on entertainment and holidays.
As soon as you receive your salary, think about how you could direct this to a savings option such as a high-interest-earning savings account or your mortgage offset account, which could also help you reduce your interest repayments.
Review your providers and banks
You could potentially save hundreds if you switch utilities, health insurance providers and home loan providers. It’s worth setting aside a morning every month to review one provider. Don’t be afraid to call your bank and ask for a better interest rate or contact a mortgage broker to find out how you can save.
GENERAL ADVICE WARNING
The advice contained within this document does not consider any person’s particular objectives, needs or financial situation. Before making a decision regarding the acquisition or disposal of a Financial Product, persons should assess whether the advice is appropriate to their objectives, needs or financial situation. Persons may wish to make their assessment themselves or seek the help of an adviser. No responsibility is taken for persons acting on the information within this document. Persons doing so, do so at their own risk. Before acquiring a financial product, a person should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.