Why the “money rules” of old won’t help you save today

The world has changed, so many of the money rules we've been following need to change too.

A lot of what we are told about money is based on myths, half-truths and Victorian-era morality.

Old rules – such as "buy the biggest house you can afford, even if you have to stretch yourself a bit" or "if only you spent less on coffee, you would be fine" – don't work in today's world.

So, what has changed to make today so different to your parents' or grandparents' world?

Banking

When your parents or grandparents were young and had a steady job, they could afford a nice house and a car, and money sort of took care of itself.

This is not because they were any better at managing money. It's just that the system wouldn't let them spend more than they earned. When their pay packet was spent, they had to stop spending until the next one arrived.

The government regulated the activities of the banks so you could only borrow what you could afford, and credit cards were rare. This made it pretty hard to overcommit on debt repayments. Now, Australians owe around $18.1 billion on 13.1 million credit cards.

Inflation has been (largely) tamed

Many Australians will be unfamiliar with high and persistent inflation and find the current re-emergence of inflation as strange and perhaps a little scary. Today's inflation is largely the result of geopolitical events and supply constraints and, in contrast to the 1970s and 80s, is likely to be transitory.

High inflation back then meant that it didn't really matter if you paid a little too much for your first home, or you borrowed a little more than you should. Inflation delivered pay and made the problem disappear.

In 1979, Sydney's median house price was $50,700, average earnings were $12,896, inflation was 10.2% and mortgage rates were 9.13%. A homebuyer who borrowed $40,000 to buy this $50,700 house would repay $4,475 annually or 35% of their pay.

Within a year, their pay rise (to $14,456) would reduce this to 31%, and in another year a comfortable 28%. Meanwhile, the value of the house increased to $78,900. So even if they paid a few thousand more than the house was really worth or they could afford, it all ended well.

In 2022, with historically low mortgage rates heading higher, sluggish wage growth and a slowing property market, the pain of stretching your budget to buy that first home will last longer.

Housing has (sort of) got more expensive

Despite outsized increases in Australian house prices, the proportion of the average household budget spent on housing has changed little in the past few decades. How can this be possible?

• A typical household now has 2 earners, and women are earning more than before.
• Interest rates have fallen from 10% to 2%, and so the loan you could repay with the same monthly payment has more than doubled.
• Loan terms have increased from 20 years to 30, increasing the loan you could repay with the same monthly payment by a further 35%.

This increased borrowing capacity has been capitalised into house prices and made saving a deposit the main hurdle for first home buyers.

We have to do more for ourselves

A job for life and an employer pension used to be common. Compulsory super turned us all into mini-pension fund managers, a task for which we are ill-equipped.

Now we must make so many financial decisions but haven't been given the tools or education to cope, including having access to affordable financial advice.

We are exposed to a greater variety of lifestyles

Society today is also more socially mobile. We see people with much less than we have, and we see people with much more. Because money is the last taboo it makes it impossible to assess from the outside how others really compare to us.

Our parents generally only saw such lifestyles on television or at the movies, where it was easier to tell fantasy and reality apart. Social media, where we portray our lives on Instagram as we wish them to be seen, provides a warped sense of reality that makes comparisons even tougher.

30 is the new 20, but 75 isn't the new 65

We now spend longer in education and deferring major life events. The median age for first marriages is up 4 years since 2009, the average first homebuyer in 2020 is 10 years older than in 1970 and a quarter of first-time mums are now over 35.

We are also living longer, but the age at which we retire hasn't risen accordingly. As a result, we work for less of our lives and expect to live a longer, more active retirement. Making 40 years of income pay for 70 years of adult life is one of our greatest money challenges.

We need new money rules

All these changes mean we need new rules to live by. Because you can't win today's money game playing by yesterday's money rules. Here are 3 to think about:

• Rule 1: Success with money is not the result of thousands of tiny decisions agonised over (latte, anybody?), but a handful made with mindfulness: where you live, what you drive, how you prepare for the unexpected, how you provide for retirement, how you make a living, and who you marry.
• Rule 2: Buy property, not too much, when the time is right for you.
• Rule 3: Avoid dividing your spending into needs and wants; focus instead on how it makes you feel. All spending fulfils some need – so identify the real need you are trying to satisfy and then choose the best way to meet it.

Vince Scully is the author of Live the Life You Want With the Money You Have: The Money Handbook For a New Generation and the founder of financial advice platform Life Sherpa. He has over 30 years' experience as a qualified accountant, financial planner and mortgage broker, and is a passionate advocate for better financial outcomes for young Australians

Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.

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