Do you and your money need a session on the “relationship couch”?

budgeting

By Damien Quirk, Financial Advisor

“Well, it’s not as if I haven’t tried to reign in my spending. But I see that ‘must have’ item and I have to have it! I’m in the moment and caught up in all the excitement. After a while, I regret the purchase but I tend to do this again and again. Do I have a problem?”

Spenditis

Well, I’m not qualified in so far as to diagnose “spenditis”, but from a financial planning point of view, you do seem to have a deficiency. Not of vitamin D, your wardrobe suggests you get plenty of sunlight. And it’s not anything that you’ll need to visit a doctor for. Your deficiency is a lack of goals and no plan.

Both men and women can suffer from this condition but I’m going to pick on the men this time around. But ladies you know it can happen to you too, it just shows up differently in the ‘must have’ item.  For men, it’s usually in larger items like bikes, cars, jet skis, and Bali trips. No matter what the target of your spending affection, it is all paid from after-tax dollars. So let’s see how this works.

An example

For example, say you put $7,000 down to pay for pre-delivery costs, a trailer plus registration and now you are enjoying the beachside delights that only a Sea-Doo Spark in Bubblegum can bring. I don’t want to judge the purchase; that’s not my purpose. The purpose is to place into perspective the real “up front” cost of that purchase and see how it reflects against your goals.

If you earn $150,000 as your taxable income for the 2013 financial year, you won’t receive all of it. It’s guaranteed in law that the Australian Tax Office will want a slice. They will take on average $43,447 plus the Medicare levy of $2,250. So, when combined you’ll pay the ATO $45,697 at full tote (no deductions, no rebates, no exemptions, no reportable fringe benefits and no dependent spouse or children to help). The 2013 simple tax calculator from the ATO allows us to assume from the earlier calculations the average income tax rate of 29 cents in every dollar you earn plus the Medicare levy. So let’s review that Sea-Doo Spark purchase again.

The Sea-Doo Spark is $7,000 plus additional costs to take it away from the dealer on its own trailer.  You earn $150,000 per annum. If you add back the income tax you incurred to earn $7,000 after tax, it would amount to $9,030. You might consider that the full cost for your Sea-Doo Spark or, at the very least, the true reflection of your earnings required to fund its purchase. You can apply this approach to all your purchases to see how you’re spending those hard earned dollars along with your contribution to the ATO.

Objectives and future planning to grow wealth

Can’t see the point? Well, this is the reason why it’s time to set out some objectives and measure your achievement toward them frequently. If you don’t have some passive income being established (e.g. income from investments), or non-deductible debt being reduced (e.g. your mortgage), then what is your longer-term plan to grow wealth? What ramification will there be on your future-self from the financial decisions you make today?

If you have a plan, and part of that financial plan sets aside some cash each year for toys or shopping for whatever that ‘must have’ item is, then that is a great step because the amounts have been quantified and budgeted for and you can measure your achievement toward sticking to that goal. Paying your income tax is accounted for against both your short and long term goals. We may also be able to help you to legally reduce the amount you pay to the ATO on what you spend through some optimisation of your debt, investments, superannuation and legal structures. Whatever tax you save you get to keep or, better still, invest!

If you don’t have a plan at the moment, the purchases made whilst having spenditis will one day surprise you and most probably in a negative way. The reason for the surprise is that you will realise you won’t have enough wealth accumulated to leave work and retire comfortably. You may enjoy the toys and shopping now, but you will have to keep working to maintain your lifestyle or deal with a diminished quality of life in retirement. The longer you leave it, the more time it will take to make up for lost time and to accumulate sufficient wealth for your ultimate retirement. One day you will want to live on your accumulated wealth and not have to go to work every day, or to only work because you choose to, not because you have to. That is the greatest freedom from taxes and debt any one can ever have!

Don’t have a plan? Come and meet with us and we will design a financial future that includes some rewards in the short term whist taking care of the longer term goals.


Blueprint Planning Pty Ltd ABN 78 097 264 554 trading as Blueprint Wealth and Damien Quirk are Authorised Representatives and Credit Representatives of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706

Disclaimer: This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.