Find out how you can save and still have fun

Social media strategist Serena “Dot” Ryan, 43, produces a weekly podcast, Adding Up, sharing tips and experiences from her mission to become debt free and inspire others to do the same. She is on her way to saving her family thousands that she can put towards repaying her debts.

In her podcast she outlines important tweaks she’s making to improve her and her family’s financial wellbeing.

“When my then six-year-old son said to me, ‘Don’t you like spending time with us?’, I realised I needed to make a change. Working harder and earning more money wasn’t the answer. The answer was better money management,” says Ryan.

The first step was performing an audit on everything she spent and then setting a monthly budget.

“I started with my bank statements and went through every line item. I considered whether each expense was worth it,” she says, stressing this process wasn’t about extreme budgeting, in the same way extreme dieting doesn’t work in the long run.

“It won’t last and you’ll end up putting it all back on with interest. I have consistently looked at what is important to me while I reduce my debt and find ways to be creative and have fun along my debt-reduction journey.”

A key decision was how to spend money on coffee.

“In my life, coffee is necessary. But rather than cut it out, I got a nice coffee machine to have coffee at home, bought a keep cup and switched to $1 coffees at 7-Eleven. I saved $1535 by doing this for seven months between October 2018 and May 2019. I also buy coffee at a cafe occasionally using my personal budget rather than the family budget. This stops my caffeine indulgence affecting my ability to reduce my debt.”

Ryan also set up automatic debt payments so she saves 5% on her electricity bill and always uses cash for any discretionary spending.

“Rather than using a card for impulse purchases such as a night out or a new dress, I withdraw cash to have in my wallet. This significantly reduces overspending,” she says.

She advises writing out your grocery list depending on your weekly activities and what you need for the week.

“I also write down the price of each item. If I don’t know the exact cost, I write a budget of how much I’m willing to spend on it. I make sure the total cost is no more than $90. My budget is $100 a week for a family of four. Then, when I’m at the shops I write a running tally of every item I put in the trolley.”

Pre-packaged snacks can easily suck up much of the weekly grocery budget so she’s started baking muffins, biscuits and pikelets to fill up school lunch boxes. “Also go for fruit and veg that’s in season and use overripe fruit for baking – banana muffins are a big hit with my boys.”

Ryan says this process of tracking her grocery spending has allowed her to pay off and close two maxed-out credit cards totalling $7000.

“I’m currently working on the third and final credit card and I expect to be able to pay it off and cut it up by June 28, 2020,” she says.

She’s also saved money on her mortgage. When the fixed portion of her loan was due for renewal, she approached two other banks and found out both their rates were cheaper than her existing lender’s rate. She shared the other banks’ lower rates when she met with her existing bank.

“A week later the bank came back to me with a new rate for us to stay with them and I saved 0.66% on our existing rate.”

This time of life is typically the consolidation and growth phase of your wealth-creation journey. At this stage, it’s important to have a multi-pronged approach that includes strategies to reduce your debts and at the same time grow your assets.

“Reducing your debt may look appealing as it delivers a risk-free and often tax-effective benefit to your financial position,” says Pete Pennicott, a director and financial adviser at Pekada. “But that is only half of the story. In the extremely low interest rate environment, you need to consider the opportunity cost of debt reduction versus investing into growth assets which, over time, have proven to deliver greater returns than mortgage rates.”

Having funds sitting in an everyday bank or online savings account is rarely the best option if you do have debts. This is because the earnings rate is generally lower than your loan interest rate and is also subject to income tax.

“A better use in most cases will be to hold the funds in an offset account, which reduces interest payable but still provides at-call access to the funds. An offset account is really a no-brainer if you have a home loan, as it is a simple and risk-free way to make your loan payments go further,” says Pennicott.

In a falling interest rate environment a good piece of advice is to maintain your loan repayments at their current rate even when the minimum amount is reduced due to lower interest rates. This means more of your payment goes towards reducing the loan’s principle and accelerating your path to becoming debt free.

It’s also important to acknowledge that it can be difficult to reduce debt and save at this time of life because there are many demands for your money. Your 40s and 50s are also likely to be the years when you’re saddled with the most debt thanks to a mortgage on your home.

“You may need a bigger home as your kids get older. Then, there are all the additional out-of-pocket expenses such as the cost of running a second car to get the kids to sport, laptops and school equipment, mobile phones, clothes, parties and holidays.

“It’s easy to lose track of spending and take your eye off your goals during this stage. So it’s important to ensure your retirement savings are working efficiently at this stage,” says Brett Schatto, chief executive of Pride Advice in Adelaide.

These years are also the ultimate income-generating years if you have worked hard and are at the peak of your working life potential. This means it’s critical to have a plan for these years to make sure you maximise every dollar to help you on the road to financial independence.

“Regularly review your mortgage repayments. And if you’re keen to invest, ensure you pay off any bad debt first,” says financial planner Gianna Thomson.

Good debts are investment debts that are tax deductible, particularly where the growth and income from the investment are more than the cost of debt. Bad debt includes consumer debt such as credit cards, buy now, pay later services and personal car loans.

Depending on your circumstances, you may feel comfortable forgoing higher debt repayments to focus on salary sacrificing into your superannuation fund. This reduces your income and tax payable.

“If this is the approach you choose, a taxfree lump sum could be withdrawn from your super when you retire to pay off your mortgage,” says Thomson.

It’s also important to recognise that illness and injury can be a problem for this group. “If you don’t have personal insurances in place, people often use their credit card or redraw to fund medical expenses,” says Thomson.

To avoid this situation, ensure you have the right income protection and trauma insurance in place early in life. If you do fall ill, an option may be to reduce your repayments by switching from a principle and interest to interest-only mortgage.

Try to avoid getting into debt to pay school fees during these years. Thomson says her son was born in September this year and he already has an education fund. One idea is to use online calculators that help with estimating the cost of private schooling or university and how much you need to save or invest every month.

During these years, another option may be to use the equity in your home to free up cash flow that can be allocated to debt-recycling strategies such as converting the equity from the main home into a line of credit. This may be applicable for people who have paid off half or more of their home loan.

“This may be an efficient way of creating a productive asset such as an investment portfolio. Surplus cash flow or savings are used to reduce the outstanding home loan balance, reducing non-deductible debt and converting this into tax-deductible debt,” says Mike Lawson, from About the Goal Financial Solutions.

“This process can continue until the home loan is repaid. When this is done, surplus income can be used to acquire additional investments or pay down the investment loan.

The middle life years can also be when the risk of “sexually transmitted debt” – debt you catch from your partner – is highest.

“It’s not necessarily malicious, but the end result, whether or not the relationship has ended, is you can end up with debt simply from being in that relationship,” says FinFit’s Donna Sgangarella.

“Sexually transmitted debt can be long lasting and very damaging. Communication is key between partners. You need to openly talk about your finances and ask this simple question: what would happen if everything was to go wrong?”

In an ideal world, people heading into retirement would have zero or minimal debt and meaningful savings. But it is hard to service a significant mortgage and contribute to super at the same time. The right debt, savings and investment strategy for you will depend on your personal circumstances, goals and priorities.

“You should avoid debt at all costs in your 60s, especially getting any new debt,” says FinFit’s Donna Sgangarella. “You’re not going to work forever so you should be spending this part of your life putting money away for when you do retire.

“If you’ve got some debt then you’re going to need an income to pay it off. The alternative is to sell your home, pay off your loans then either rent for the rest of your life or buy a home with the proceeds from the sale of your former home without borrowing any money.”

People who are older than 65 and looking to downsize may be able to get rid of any outstanding mortgage debt and take advantage of a new downsizer contribution into superannuation.

“A couple can contribute up to $600,000 to

their super fund for a tax-free income stream if they are able to satisfy certain conditions. This contribution stands alone from the $1.6 million transfer balance cap,” says Mike Lawson, from About the Goal Financial Solutions.

The transfer balance cap limits the amount

people can hold in superannuation and that is eligible for the attractive tax concessions available in this environment.

Reverse mortgages or equity release facilities are other services people may access after retirement.

“There are a variety of solutions and products to navigate and the devil is in the detail, so ensure you understand the terms and conditions, which can be quite complicated,” says Pete Pennicott, a director and financial adviser at Pekada. “Always do your research, compare alternatives, read the terms and conditions and make sure you know what you’re getting yourself into.”

Think long term with any decisions about your debt, as there may be unintended consequences in the event you want to move home, downsize or need to transition to aged care. It is critical to understand what your exit strategies look like in each of those circumstances.

“It can make a significant positive impact on the quality of life retirees can enjoy through accessing part of the wealth they have built up in their property,” says Pennicott.

“Too often individuals who want to remain living in the family home through retirement do so with a modest level of income. This is usually because they don’t have liquid assets to fund their later years as the bulk of their wealth is tied up in an illiquid and non-income-producing asset such as the family home.”

Parents often worry about what they are going to leave to the next generation. But if they ask their children whether they would rather have a bigger inheritance or see their parents enjoy their retirement and use their wealth to achieve this, most kids would opt for the latter.

“Equity release or reverse mortgage solutions can be a useful tool for people who are not hung up on passing their wealth to their beneficiaries. In this case, priority should be on funding a lifestyle rather than intergenerational wealth transfer, and accessing the value in the family home may appeal,” says Pennicott.