The cash-strapped money squeeze. It can hit at any time, but it can really bite when you start a family.
Picture it: you’re a young hot couple, you’ve just bought a house with a mortgage but soon, you’re about to go from 2.1-something incomes down to just 1, or 1.5, once that baby arrives – oh and don’t forget the cost of childcare.
This is the Squeeze.
You can still remember what it felt like when you were DINKs (double income, no kids). Back then you didn’t have to think that much about managing your money. Mobile phone plans, rent or mortgage – you didn’t love any of them but there was always enough income coming in to pay the bills (or at least pay off the credit card a few weeks after).
Now money feels that extra bit tighter…and in a few years you can see school fees coming. You wonder if there’s a light at the end of the tunnel.
So what are some of the best ways to get through The Squeeze?
There are a lot of expenses during The Squeeze that in a long-term plan, should be considered only temporary.
When the kids are 10 & 12 I don’t think there’s any argument that you should be meeting all of their living expenses. But fast forward a decade to when they’re 20 & 22, and again to 30 & 32, and the question becomes a bit more vexed.
The Squeeze is supposed to be a temporary phenomenon but if you keep supporting everybody else’s lifestyle at the expense of your saving, you’ll never get out.
“Don’t miss opportunities to trim your expenses where sensible either.”
Check in with a mortgage broker or online to see if your home loan interest rate is still competitive – it’s likely to be one of the biggest items in your personal budget.
Check whether you’re actually using the mobile, phone & internet subscriptions you have, or if you could drop down to a plan with a lower level of inclusions but lower cost.
When you start to get the promotions at work that you’ve worked hard for – reward yourself but also reward your future self. Look for little opportunities to do things like increase the mortgage payment or make extra super contributions with your payrise.
It’s natural when your family is growing that so will the size of the house you need, but you still need to consider affordability. A 45 year old taking on a 30 year mortgage needs a serious commitment to one or a combination of the following strategies:
- Working until age 75 (ouch)
- Selling the property and downsizing to something that costs less, when the kids have moved out before retirement
- Making repayments on the mortgage above the minimum, either on a regular basis or through future lump sums such as an inheritance
It’s also good to have some perspective through The Squeeze.
- You’ve got at least compulsory employer contributions of 9.5 pr cent going into your super. It might not seem like real income to you now, but it’s building the assets that you’ll live off when you stop work.
- While it’s a small portion in the early days, principal & interest mortgage payments are making a dent in the principal of your home loan. Keep at it and you’ll in time be paying more principal and less interest with each payment.
- You’re building and maintaining your human capital just by being at work. That’s the skills, experience and networks that you’ll be drawing on to increase your income in the future.
During The Squeeze, it’s hard to look past tomorrow and into the future. What you’re experiencing today – it’s what many of successful retirees were doing 20 and 30 years ago and they felt just the same way at the time. Now they’re in a position where they own their homes and have money in super to pay for retirement. It takes time but it really does work.