When a Sydney couple bought their first home they appeared to be onto a good thing – but one decision cost them a whopping $350,000.
If you don’t manage risk when you invest, you can make costly mistakes that can slow down your financial progress and cause a lot of frustration and stress.
Some risks are clear and easy to understand and manage, like the risk of you losing your job or interest rates increasing. But others are hidden below the surface and are easy to miss, if you don’t know what to look out for.
I was working with a client a few years back that came to me in an OK financial position, but after I got to know them and their background better I found out they’d made a major mistake that cost them hundreds of thousands of dollars.
This was a couple who through their late 20s and early 30s saved hard to buy their first home, and ultimately bought a lovely terrace home in Sydney’s inner west. The property wasn’t cheap, but it wasn’t extravagant.
When they were planning the purchase they did all of the things you’re told to do, and thought they were all set up for success. But they missed one big thing that came back to bite them a few years later.
When they purchased the property, they took the time to make sure it fit with their budget, and they even included a bit of a buffer for increases in mortgage interest rates. At the time they figured this was important to ensure the purchase would work well for them.
Post the purchase things were going well, they loved the place, they lived a good lifestyle, and the property started increasing in value. Then they got married and started planning a family. This is when they realised they were headed for financial trouble.
Family planning and your investing
When they started looking at the financial impact around maternity and paternity leave, returning to work initially in a part time capacity, and including daycare costs, their budget just wasn’t adding up.
They couldn’t do all the things they wanted around starting a family and live the lifestyle they wanted and afford the mortgage repayments on their home – something had to give. I call this ‘lifestyle risk’, where the lifestyle you want to live becomes inconsistent with your investments. It’s a risk so many people don’t think about when they’re investing, but it can lead to serious frustration and ultimately poor financial outcomes.
Our couple tried changing a few things with their budget, but realised the sacrifices were more than they were prepared to make, and ultimately decided they needed to sell their property.
They sold the property around three years after they purchased it, and made around $300k after all their expenses. Good money no doubt, but their potential was so much more …
Getting back on track
I helped them plan and then execute on purchasing another property to get back onto the property ladder around four years after they sold their first home. But in that four-year period, the property market in Sydney increased significantly and they ended up getting a lot less for the same money they’d sold their place for.
We calculated the property sale, delay, and then the repurchase of a property put them $350k behind where they otherwise would have been. Once this couple got back into the property market they were again on a good financial path, but they definitely would have preferred to be there with an extra $350k behind them.
This is an example of a situation where you can make an investment that makes you a bunch of money, but ends up being the wrong move for you.
If they’d just spent a little less on the property, or purchased the property as an investment and rented the place they wanted to live in, they would have been able to hold the property for the long term, and benefited so much more from the purchase, both financially and personally.
If you ask yourself whether something is a good investment in absolute terms, but not whether it’s the right investment for you, it can be a disaster.
How to avoid lifestyle risk
There’s only really one way to avoid the chance of lifestyle risk throwing a spanner into your investing plans, and it’s actually a simple one – but that doesn’t mean it’s easy.
To avoid lifestyle risk, you need to get clear on what your money looks like today. What money you have coming in (income), the spending that’s important to you, and what savings, investments, and debts you currently have in place. This will give you a baseline financial picture to build from.
But looking only at today can lead to trouble, as we saw in the example above. You need to look beyond today alone, to see how things will change over the years to come.
Particularly if you’re expecting changes to your income or expenses, planning a family with time out of the workforce, working part time, schooling and childcare costs, etc.
These changes can have a big impact on how much money you have to work with when it comes to your investing, funding mortgage repayments, or what your financial safety cushion looks like.
Always think ahead when making an investment. Picture: Christian Gilles/NCA NewsWire
Looking at your money today and also into the future gives you the true baseline that you can then use to look at the impact of different money moves and investments. This way, if you’re planning a property purchase, you can make sure it fits not just with your position today, but also that it will still fit as your position changes over time.
There’s a bit of work involved in doing this, and if you’re not great with numbers or spreadsheets you may need to get some professional help.
But, as you can see from the scenario above, getting your strategy right will have an impact likely measured in the hundreds of thousands of dollars – the juice is worth the squeeze here.
The wrap
There’s a big difference between making money moves that are right for you today, and one that will fit with what you want from your money over the long term. If you don’t plan smart when you invest, you can end up being forced to unwind things in the future, which can be a costly exercise.
But if you’re smart about how you plan your investments, and how you manage your risk (including lifestyle risk), you go a long way to setting up your investments (and yourself) for success. Before you invest, take the time to look ahead – this will help you choose investments that will create the upside you want both today and for the years to come.
Ben Nash is a finance expert commentator, podcaster, financial advisor and founder of Pivot Wealth, the host of the How to be Successful with Money podcast, and author of the Amazon Best Selling Book ‘Get Unstuck’.
Ben runs regular free online money education events to help you make better money choices and get ahead faster. You can check out all the details and book your place here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
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