The biggest money ‘fail’ for young professionals

Ben Nash

It’s normal (and sensible) to be concerned about risk when it comes to your money. A healthy dose of fear will help you focus and possibly avoid losing your hard earned money.

But what does a healthy dose of risk look like and how do you know if you’re you managing your risk properly?

Risk with money comes in many forms. There are the standard risks like investment risk, inflation risk, interest rate risk, etc. But, the risk we most commonly see being poorly managed is lifestyle risk. The problem is, this is probably the most important risk you need to manage if you want your money strategy to be successful.

I was introduced to a couple recently (will call them Dave and Cara) who had run into a really common issue. When Dave and Cara purchased their property it seemed a great decision. But things changed fast…

Dave and Cara were in a solid position at the time. They’re both Young Professionals working in the education space, had good incomes, and plenty of spare cashflow. Dave and Cara also loved to travel. Dave was originally from Europe and still had a lot of family there, so they tried to get back as often as they could, often with a few side trips along the way…

Dave and Cara found a gem of a property to buy as their first home and they thought they were doing everything right.

Then about a year later they decided to have their first child, and Cara fell pregnant shortly after. They were super excited and started thinking about their future plans. They both wanted Cara to have around 12 months off work when their baby was born, and then to go back to work part time for the next couple of years.

But when they started running their numbers, they realised there was a serious problem. With their mortgage payments, living expenses, and Cara’s lower income, they calculated they were going to start going backwards quickly. They figured it wouldn’t be long until they had exhausted all the money they have saved over the last two years.

Dave and Cara were now in a bit of a bind, because their situation as it stood wasn’t going to allow them to live the sort of lifestyle they wanted. They didn’t really want to have to cut back on expenses and reduce their holiday budget, but they were running out of options.

Long story short, Dave and Cara were eventually put in a position where they had to sell their property.

But there is a silver lining here.

The property Dave and Cara bought was actually a really good investment. In the couple of years they owned it, the property had increased in value by around $100,000. That meant that after paying all the costs involved with the purchase and sale, and paying off their credit cards which had taken a hit over the last year, they still had a small amount leftover to put back into their savings account.

I met Dave and Cara about two years later, and in that time they had started saving again and wanted to get back into the property market. Not surprisingly for Dave and Cara it was important they didn’t repeat their past mistakes and run into trouble again.

So we did things a little differently second time around.

This time, when setting up Dave and Cara’s plan we took the time to map out the lifestyle they wanted and how their situation was likely to change over time. We factored these changes in, and made sure their property purchase would fit with the other things that were really important to them.

Buy the time Dave and Cara purchased their second property, it was eight years after they bought their first place, and around four years after they sold it. In that time, the Sydney property market had increased significantly, and because Dave and Cara were out of the market for the last four years (where the biggest price rises were seen), they had missed out on much of that growth.

This was a costly mistake, as when they purchased their second property, they still got a great investment, but they ended up paying more money for less house than they had previously.

Dave and Cara thought they were doing everything right when they bought their first property. But, they hadn’t considered one of the most important risks Young Professionals face, lifestyle risk. Lifestyle risk is critical to manage, and if you don’t you can end up stuck in the same impossible position Dave and Cara found themselves in.

Most people don’t fully understand different types of risk, where it really comes from, and how you can successfully avoid bad risk and use good risk to your advantage. I often see people facing either too much risk because they don’t understand the potential impact, or not enough (good) risk which can be equally costly.

Dave and Cara managed to avoid going backwards, but their decisions definitely meant much slower progress than they could have otherwise enjoyed.

Take the time to plan your strategy and map out your path and make sure your most important risks are effectively managed. Don’t let the unknown hold you back from getting the results you want.

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