Good time guy learns hard money lessons

Key points:

• Jasper needs to change some habits around spending and saving,  starting with monitoring where his money is going and starting to build up a buffer savings fund.
• His mum should seek advice before handing him the inheritance money so they have a plan in place, including ensuring he signs a pre-nup before going into a long-term partnership and making considered decisions with what he spends the money on.
• It’s important to educate yourself. While a low-income earner may not think they can afford financial advice, there are plenty of free resources out there such as the MoneySmart website, or other low-cost online resources or books.
• He should be consistent and disciplined with this money, including checking in regularly with his plan or planner, being aware that changing behaviours takes time.

Unexpected windfall
A low-income earner living paycheck-to-paycheck receives a huge cash windfall from his mum. Will this save him from the financial turmoil he’s inevitably going down or will his bad habits sabotage the potential financial freedom he’s been given a ticket to?

Introducing Jasper
Jasper is a low-income earner living one pay to the next. With nothing in savings and no financial plan for the future, at 43 years old he’s moved back in with his elderly mother where his rent money can be spent at the pub. One dead-end job to the next and only $50,000 in super by mid-life, it seems like there’s little hope for Jasper’s financial future.

That’s until he unexpectedly receives an $800,000 inheritance from his mum, who wants nothing more than to help her only son have a better future. But with Jasper’s bad financial habits stemming from his “live for the moment” mindset, she’s rightly concerned about handing the money over.

Financial Advisor at Federation Financial Services, Dave Rae, explains that people like Jasper, who are living day by day with little concept of how to manage or grow their money, need to get really clear on their future path.

“It’s not uncommon for someone to get to age 43 and not really have a plan. It’s really important for him to start to become clear on the path he wants to take and where he wants to get to,” Dave says.

Disciplined decisions
Dave says people like Jasper need to consider their discipline around their spending choices. This means setting up automated savings, monitoring spending and having an awareness of where the money goes.

Jasper needs to be willing to change some unhelpful habits, and start sooner rather than later, as it will only get harder to get on the right path as time goes on. “If we start to put the right things in place, we can get on track to where we want to be – but it’s going to take discipline,” Dave explains.

“Like most people, Jasper’s someone who doesn’t do budgets – and they don’t necessarily work for everybody. I think a lot of people struggle with a budget. What seems to work better is monitoring your spending, looking at what you’re spending over time and having that awareness,” he says.

“Often it’s easy to see those things that don’t seem like a lot that you’re spending but when you add it up over a period it actually starts to look like a lot, so having some awareness can start to help.”

Jasper’s main priority should be growing his savings buffer and building an emergency fund above anything else. When it comes to putting away savings, Dave suggests having funds automatically withdrawn on a regular basis, so the money is put away before you can spend it.

“I’d suggest, as much as he can, he takes the decisions away from his spending, putting in an automated savings plan to have money going away from his transaction account before he can spend it,” Dave suggests.

“Each month $200 will automatically go into a savings account that’s harder to touch, something like that. Too often people will just spend whatever is in their account and just save whatever is left over, but if you’re just spending everything most likely there isn’t going to be anything left over.”

Handing over an inheritance
Baby Boomer parents want to help their kids out financially if they can, but Dave says it’s paramount for parents to seek advice before handing the money over in order to try to keep the inheritance in the family and protect the assets.

“It’s very common these days that parents want to help out their kids. It might be a property purchase or a loan or help them start a business, for their kids or grandkids,” Dave says. “Make sure you’re getting some advice from a solicitor as to how you can protect that.”

Being aware of Jasper’s behaviours around money –including his inability to hold onto his earnings – his mum is apprehensive about him having access to that sum of money.

“The first thing she should have been doing, knowing Jasper and how he’s been unable to save money and the lifestyle he has led up to this point, is getting some legal advice as to the best way to help him out,” Dave says.

“In this case, it could be advice to help protect Jasper from going and blowing it all to protecting him if he goes into a relationship without a pre-nup and potentially a lot of the money that’s come to his mum ends up going to someone else after a settlement. I think that’s really important to protect the assets as much as you can.”

Jasper ends up marrying a soccer mum and gets divorced five years later – without having signed a pre-nup to protect the assets, going against his financial planner’s advice – and he loses half of the home he purchased with his mum’s money in the divorce settlement.

Receiving a windfall
“One of the things I think would be really important for him is to make sure the advice that he’s getting is regular. He got some really good advice but, left to his own devices, he slipped into old habits,” Dave observed.

“That regular advice and reminding him of the plan and what that better future could look like for him could come from that more regular check-in.”

Dave says, without a doubt, he should have listened to the advice to get a pre-nup before committing to his partner. “It’s a really difficult conversation to bring up with a prospective partner but I think you’ve got to look at the statistics of relationship breakdowns,” Dave says.

“In this case for Jasper, it’s money that’s come from his mum where she’s built up her asset base over her life. He’d also be doing the right thing by her by protecting those assets,” he adds.

“She wants that money to be protecting him, not somebody who he might be in a relationship with for a few years, so it’s very critical that he does get one. It’s important they have that conversation and discuss the merits of it.”

Intergenerational wealth transfer
There’s a huge windfall of $3.5 trillion expected to be handed down from parents to the next generation in Australia over the coming years, as outlined in a Griffith University and No More Practice Education report, ‘Reinvention is the New Retirement’.

“If you think about this intergenerational wealth, a lot of it is going to be almost like a lottery win because it’s going to be quite substantial as the next generation receives money via substantive property assets and the like,” Dave says.

“I think it becomes an issue for not just the person receiving it, but it becomes a family responsibility as well,” he adds. “There’s a real family planning aspect to it.”

The age of the kids and how the assets are being passed down all need to be considered. “Parents who are going to be passing this wealth on should be thinking about the kids they are passing it onto,” Dave says.

He says it’s important to be careful not to pass large capital sums to children who are still young, and if they’re older to consider what they’re doing in their lives –such as if they’re running a business which could pose a greater risk if something was to go wrong.

“Often it’s going to be happening to kids under the age of 30, and at that age, dealing with hundreds of thousands of dollars or what could be millions, people just don’t have experience in dealing with a windfall of that extent,” Dave explains.

When it comes to passing on and receiving a significant inheritance, it’s important to get sound advice to know how to handle this sort of wealth transfer.

“Seek out some advice for the best way to handle that sort of sum of money, because you’ll be dealing with the same sort of issues we were talking about here with Jasper – do I buy a property, and should I have a pre-nup if I’m in a relationship?” Dave explains.

Changing behaviours
Self-sabotaging behaviours, like our spending and savings habits or our unwillingness to earn more, can be difficult to break because they stem from old patterns of repetition over the years.

“In Jasper’s case, he remembered how hard his dad worked and he didn’t want to do that, so his behaviours came from his family experience. These kinds of things can be really difficult to address and it’s not something he’s going to be able to do on his own,” Dave says.

Dave acknowledges that getting financial advice for low-income earners might be out of the question, but there are plenty of free or low-cost options out there to help you monitor your spending habits.

He suggests starting to educate yourself using free resources like the government’s MoneySmart website, trusted online education resources, or reading a book about money and behaviour.

“I appreciate that on a low income it’s easier said than done but it’s having an awareness of where you sit today and what the consequences are of not changing and starting to have some understanding of that,” Dave says.

He said it’s about taking a look at where you are now and where you want to go, taking into consideration what you’re going to need for a comfortable retirement. “It’s having awareness and trying not to bury your head in the ground and starting to take some interest in it,” Dave adds.