20s & 30s | Abound Financial & Lifestyle Planning
20s & 30s
Brad and Julie Paterson have a young family and are renting an apartment in the inner city. They work not far from home and their child attends the local preschool. The Patersons are considering buying a home to provide more room for their growing family.
At the moment they are unsure if what they are doing is the right thing for their circumstances and what they should be doing to achieve their desired lifestyle. They would also like to sure up their financial position and put a plan in place to provide for their family’s future.
Brad and Julie discussed their situation and lifestyle goals with their financial planner and provided their financial details as part of the financial planning process.
Current Income and Expenditure| Brad’s gross income | $70,000 pa |
| Julie’s gross income | $80,000 pa |
| Living Expenditure | $65,000 pa |
| Rent | $25,000 pa |
Current Lifestyle Assets
| Home Contents | $10,000 |
| Motor Vehicle | $20,000 |
Current Investment Assets
| Bank Account | $3,000 |
| Brad’s Super | $30,000 |
| Julie’s Super | $35,000 |
After a thorough analysis of their finances the advice provided to the Patersons includes the following:
Cashflow
A thorough analysis of the Patersons’ cashflow illustrates their income, expenditure and any free cashflow or areas where their cashflow can be improved. A projection of their cashflow into the future indicates where opportunities may lie or potential trouble areas as their income and expenditure changes over time.
Financial modelling indicates that the Patersons should be able to save almost $25,000 on an annual basis.
First Home Saver Account
A First Home Saver Account was identified as an appropriate way of saving for a home deposit. By saving in the First Home Saver Account Brad and Julie are able to save more and have their investments grow at a higher rate as they pay less tax than they would if they saved for the deposit in an interest-earning bank account.
It was recommended that Brad and Julie each establish First Home Saver Accounts and contribute $10,000 pa to each account from their after-tax income. They will receive additional Government contributions of $850 on the first $5,000 per annum they each contribute so their total annual savings would be $21,700. Any earnings on this investment are then taxed at a maximum of 15%, compared to Brad and Julie’s personal marginal tax rate of 31.50% (including Medicare levy). In four years time the Patersons could have over $85,000 which they could put towards the purchase of a home, without taking into account potential investment growth.
Insurances via Super
A number of Brad and Julie’s goals fall within a 10 year timeframe. Their ongoing income and free cashflow needs to be allocated to achieving these goals. They also need to ensure that their achievements are not compromised through unforeseen circumstances. Appropriate personal insurances such as life, total and permanent disablement and income protection are implemented via superannuation. The policies are implemented via superannuation as the premiums can be funded from the Patersons’ superannuation guarantee contributions and so won’t affect their free cashflow detrimentally.
Brad and Julie’s employer superannuation funds provide the options for insurance cover. An analysis of their insurance needs indicated that Brad requires life and TPD cover of $800,000, trauma cover of $100,000 and income protection of $4,375 per month. Julie requires life and TPD cover of $900,000, trauma cover of $150,000 and income protection of $5,000 per month.
The life, TPD and income protection insurance are implemented via Brad and Julie’s superannuation funds with annual premiums of $1,500 and $2,000 paid from superannuation. The trauma cover is not available via superannuation and is implemented in their individual names at an annual cost of $300 and $400 respectively.
Home Loan
Financial modelling and projections of their recommended position incorporate expected future income, expenditure and savings. The projections indicate that Brad and Julie should have adequate savings in four years time and their income should be such that they can afford to take out a home loan with a 20 year term without stretching their finances. This should allow them to purchase their desired property and repay the home loan within their desired timeframe.
In four years time the Patersons should have over $85,000 that they can put towards their new home. If they borrowed a further $450,000 they could spend $535,000 on a new property. With a loan term of 20 years and interest rate at 7% repayments on the loan would be approximately $41,000 pa. This comfortably fits into the Patersons’ cashflow while leaving them with a cashflow surplus in excess of $9,000 pa that could be used to provide for other expenditure or increase their mortgage repayments and repay the mortgage within a shorter timeframe. Without the need to make rent payments of $25,000 pa added to their previous savings capacity of $25,000 pa the Patersons have the ability to make loan repayments of $50,000 pa.
The advice provided to Brad and Julie helped to form a strategy around their home purchase goal while providing certainty in regards to their financial future and lifestyle.