Why has your household cut back on spending?

I haven't. Poll is busted without that option. I'm recycling PPOR debt into shares. Have minimal lifestyle wants.

 

Since I rid myself of all my responsibilities, property & tenants and sold the lot, I can spend what I like and help my son & daughter. First time ever and I am enjoying it ...

 

Wage increases are one way to achieve improved borrowing power...but for those who aren't seeing any wage increases ( and that's a fairly healthy chunk of the workforce) debt reduction - such as @Peter_Tersteeg and I have outlined , is the other effective method.

 

Wow the poll results are scary, arent they?

 

Good post Peter.
There is certainly a sense of achievement once that final payment is made. For many, owning their own home unencumbered is all the investment they need.

 

I actually managed to pay off my house a few years ago, around mid 2017.

I then knocked it down, built my dream house and took out a loan 3 times the size!

 

@euro73 without jacking the thread, just one question as you mention paying off the PPOR increasing borrowing capacity, and previously mention paying P&I can increase servicing as well.. is that cumulative, as the loan reduces each year your capacity increases (as payments stay the same) or is it ONLY once you reach a 0 Balance/paying off the loan full.

 

I focus on increasing business income. Period.

 

I voted minimalism but really the main reason is I don’t have too much spare time or opportunities to spend big.

Compound that with general drop in staffing and skills/knowledge of staff in retail leads me to avoid shopping and spending.

 

That will vary for different people, and it will also vary depending on what someone is seeking to do. Getting an additional 300K borrowing capacity is going to be quite different to getting an additional 900K borrowing capacity, for example.

Some borrowers may require that all their PPOR debt is repaid before they can borrow enough to do what they want. Some may require that all their PPOR debt and some of their INV debt is repaid before they can borrow enough to do what they want . Some may only require refinancing to new 30 year P&I loan terms. And there will also be some who may not require any of that...yet....but will eventually require all of some of the above when they find themselves maxed out . Others never get maxed out so dont need to concern themselves with any of this. But thats not generally going to be the case if the ambition is a large portfolio..... for anyone seeking to grow a large portfolio, cash flow management and debt reduction should absolutely form part of their strategy so that they dont find themselves running out of puff prematurely. Or running into holding cost issues.

It will also vary from lender to lender- as they have different policies now on floor rates, assessment rates, treatment of OT, Comms , rent , P&I v IO, remaining loan terms etc...

Its gone from being quite standardised set of servicing calc policies across most lenders ( except Pepper, Bluestone and Liberty) to a situation where there are starting to be some some real points of difference between servicing calcs again... AMP, who were well out of things, are really sharp now for borrowing capacity, for example.

The basic concept of how debt reduction helps in a broader sense, doesnt change though...whenever you remove non income producing, non deductible debt and hold less IO debt and more P&I debt , or hold IO debt for shorter periods, servicing calcs will be friendlier /more generous to you than if you do not do those things.

How much $$$ power improves by, how long it takes, and whether it's enough to purchase what you want at the preferred budget you want, will then depend on the types of variables mentioned above.

 

On one had replacing paying off non-deductible debt gives you a bit of an advantage if you intend to borrow for investment purposes, because lenders recognise the new debt is tax deductible and has better cash flow.

On the other hand, investment loans have higher rates than non-deductible loans, so the assessment rate is higher.

The question of which type of debt has a better servicing income will depend on how much the tax deductions are worth, given you income and tax bracket, as well as the difference in rate between the two types of loans.

It's not too hard to figure out, but the result will vary from one person and scenario to the next.

 

I have but the wife hasn’t .

She is trying to kick-start the Australian economy all on her own .

 

As soon as we paid ours off, we started using it as security to buy a bunch of IPs.

Far better Net Worth creation strategy, me thinks

 

Not everyone wants a house. As a single person, I am more than happy to live in an apartment over a house if it comes with the right options for me. However, high property management fees and poor build quality of apartment build has dented my confidence. Its not even practical to appoint a building surveyor for an apartment in a block so due diligence goes out the window hence buying an apartment in Australia is one of chance with few options of redress.

 

I'm a minimalist by nature. I imagine if you do it long enough then shinny new things lose their appeal anyway.

 

I haven’t cut back - I’m spending more.

 

Same here.

 

I didn't realise many people would vote same as me - Minimalism.

Even with higher income than last year, I'm spending same as prior 5 years and putting my savings away for the future.

 

The cost of living has forced my household to cut back on discretionary spending. I've also read a few finance books recently (including the Barefoot Investor), which has motivated me to increase my after-tax contributions to superannuation, which I have now done. According to most of the finance books I've read you need to be investing 20% of your gross income to be able to live a comfortable retirement and end up as a millionaire, which is my aim. In addition, I eventually want to upgrade my PPOR so any remaining disposable income is being saved in my offset account. Initially my plan was to move to an upgraded PPOR and keep my current PPOR as an investment property. However, realistically I have realised that in order to obtain the PPOR I desire I will have to sell my current PPOR, which is another motivator to pay down debt.

As far as my lifestyle is concerned I used to spend about $20 a day buying coffee and lunch Monday-Friday. Now I save $100 a week by drinking instant coffee and bringing my own lunch to work (a banana and a can of tuna). I used to buy books that I wanted to read. Now I go to the library instead. I still drink alcohol but never purchase it from the pub or when I'm eating at a restaurant anymore. Instead I go to Dan Murphy's. Little lifestyle changes like this is why I'm now able to invest more of my money.

 

There are a few big reasons and some smaller reasons for it.

The big ones are

Consumer sentiment. APRA had a knee jerk reaction to tightening of finance and that impacted house prices. If you make people believe their single most valuable financial asset is going backwards in value they will punish by not spending. It creates lower consumer sentiment.

The other one is lack of availibility of credit. If you want to apply for a financial loan or credit card today, they want to ask questions down to color of underwear you may prefer. There is no point in having cheap money if you cant borrow it and to think a lot of spending happens using creditcard and other kind of loans its no surprise that spending is not high.

Other reasons are that up until middle of this year RBA remained, wrongly, arrogant and bullish and kept interest rates way too high for the economy that had that kind of spending. Its only now they realized their mistake and started changing direction.

Wages are important but nowhere near as much as other reasons.

Obviously having an idiot like trump battling it out with China and Europe doesnt help consumer sentiment.

Fix consumer sentiment by making credit more available and stop worrying too much about debt and I guarantee it will turn around.