Is it time to re-think the Great Australian Dream?

Once upon a time, the great Australian dream of earning a decent wage and owning your own home was within reach for most people.

Housing was affordable, mortgages were achievable and home ownership helped provide a handy nest egg to fall back on when the time came to retire.

But a new report from the Grattan Institute has highlighted how rapidly rising house prices have created a housing affordability headache that is playing havoc with the financial futures of many Australians.

The report, Housing affordability: re-imagining the Australian dream, which was released this week shows that households are spending more of their income on housing (for both rent and mortgages), while home ownership rates are declining among all Australians younger than 65.

Those who do take out a mortgage to purchase a home are taking on more risk for longer, with fewer people being able to pay off their loan fully before they retire. As a consequence, the superannuation nest egg they have accumulated is being used in part to pay off their mortgage, rather than see them comfortably through their post-work years.

Despite today’s record low interest rates, the rising cost of living and stagnating wage growth are forcing increasing numbers of people to “re-imagine” exactly what their great Australian dream looks like.

There is, however, something you can do about it. Taking control of your financial future begins by making a few changes that may seem fairly minor now, but are likely to have a meaningful impact in the long run.

Know your numbers. You’d be surprised how many of us don’t know where our money actually goes. Check your spending habits. Work out how much it costs to be you. If you are starting or expanding your family, remember to factor in the cost of childcare and education.

Have a plan. It’s easy to get caught up in the merry-go-round of life – work, family, etc. – but if you fail to plan, you plan to fail when it comes to owning your home by the time you retire. Mortgage servicing costs are currently below their historic peaks due to low interest rates, however larger mortgages are leaving borrowers at a higher risk of financial stress when interest rates inevitably rise. Set a realistic target date for paying off your mortgage and start making extra payments where you can. Aside from slashing the amount of interest you pay over the life of the loan, paying more now will help insulate you against those future rate rises.

Have a back-up plan. Many Australians are living week to week, with little savings. Research by the Commonwealth Bank in 2017 showed that more than one third of Australians are spending more than they earn each month, while one in three people would struggle to find even $500 in an emergency. Unemployment, illness or an unexpected major expense can quickly derail your finances if you don’t have access to savings. Start an emergency fund and work towards building up at least three months’ worth of income. Make sure you have income protection insurance to safeguard yourself if life takes an unexpected turn.

Start investing today. Don’t wait until the mortgage is paid off. Investing regular amounts into growth assets (such as shares) over the long term is the key to enjoying a comfortable retirement. Forget about searching for the perfect investment opportunity that is going to increase tenfold and make you rich. Financial success is achieved by putting your money to work regularly and consistently. With mortgage interest rates so low, it’s likely that your investments will provide a higher comparable return. For example, the Australian stock market has posted an average return of more than 8% pa over the last 20 years. The compounding effect of growth on growth and earnings on earnings is a beautiful thing!

Navigating the path towards your great Australian dream can be a difficult one, particularly for those already halfway through the journey.

But being mindful of your money, and the opportunities / challenges ahead, can ensure a far shorter and smoother route to a healthy financial future.