Get real with your finances by asking yourself three questions:
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What is your current financial position?
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What will it be in 10 years time?
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Will having answers to the above help?
There seems to be a strong tendency to live in the ‘now’ and let the future sort itself out. I do not believe that is necessarily a beneficial attitude. Not having a basic understanding of your financial position in ten years time is a potential hazard.
Let’s look at someone’s current position:
| Debt | $400,000 |
| House | $500,000 |
| Super | $100,000 |
| Net Position | $200,000 |
Debt $400,000 + House $500,000 + Super $100,000 = Net Position $200,000
There are 3 likely scenarios that may happen in the next 10 years:
- Pay down the debt and stay in current house
- Upsize to a bigger house
- Buy an investment property
The projected numbers and associated graphs are below:
Pay down debt |
Upsize |
Investment property |
|||||
| Debt | $250,000 | Debt | $800,000 | Debt | $750,000 | ||
| House | $800,000 | House | $1,000,000 | House | $1,300,000 | ||
| Super | $250,000 | Super | $250,000 | Super | $250,000 | ||
| Net Position | $800,000 | Net Position | $450,000 | Net Position | $800,000 | ||
Debt $250,000 + House $800,000 + Super $250,000 = Net Position $800,000
Debt $800,000 + House $1,000,000 + Super $250,000 = Net Position $450,000
Debt $750,000 + House $1,300,000 + Super $250,000 = Net Position $800,000
All of a sudden understanding these 10 year outcomes could significantly steer you down certain paths. Not knowing or reviewing this information could mean making financially poor choices.
The pie graphs give a visual representation, blue = house value, red = debt value, and green = super value. As you can see upsizing the house effectively keeps the ratios of what is owed and owned the same with the smallest increase in overall new worth.
Paying down debt or purchasing an investment property both reduce overall debt levels plus put them in a greater net wealth position.
