It used to be a sign that you’d made it. But times have certainly changed. (Source: Supplied/Getty)
Not very long ago, having a ‘six figure’ salary was a universally accepted benchmark for someone in a very comfortable financial position. But today, the average full time Aussie earns around $2,011 each week or $104,600 each year according to ABS data. With the rising cost of living, housing prices and rents, and everything in between, earning six figures no longer separates you from the pack, it is the pack.
Even earning at this level, there are a lot of chunky expenses that are competing for your paycheque, so it’s no wonder it’s still a struggle for people to get ahead.
Firstly you’ve got tax, which is the biggest cost for most households. On a $120,000 income, you’ll pay tax of over $29,000 each year, meaning a quarter of your income is gone before you even see it. And with the complexity around tax planning leading most Aussies to give up on this altogether, this is one of the biggest handbrakes that stop people from feeling comfortable.
Next is housing and rent, where even as inflation is coming down – housing remains disproportionately expensive. Rents are close to record highs across Australia’s capital cities, and vacancy rates are tight – which keeps pressure on household budgets. And with record high housing prices and current interest rates, for home owners it’s arguably harder, not easier.
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Then you’ve got transport costs, which according to current data from AAA (Australian Automotive Association), the typical Aussie household is spending around $444 weekly or almost 16% of their income on transport.
And then you’ve got living costs more broadly. And while headline inflation has cooled, price levels are higher than any time in history, meaning your dollars don’t stretch like they used to.
The bottom line here is that a paycheque that sounds big can feel ordinary once the essentials are covered.
If you want to get ahead, build momentum, and actually feel comfortable, the answer isn’t just to earn well (or even to earn more) – it’s to use what you do earn more effectively.
No matter what your income is, the first step is to spend less than you earn. It sounds basic, but all higher earners fall into the trap of lifestyle creep at some level – upgrading cars, homes, or holidays as their income increases. This keeps savings stagnant and stress high, so should be avoided at all costs.
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The simplest fix is automation, where you have a portion or your income directed to savings or investments the moment it hits your account. You should then review this as your income increases over time, ensuring your savings rate is increasing along with your income.
Once you’ve got your savings consistently working, the next step is to make the money work harder. Leaving money sitting in a savings account may make you feel good, but with interest rates around 5% which are then taxed at marginal rates, and then taking out inflation of around 3%, any money you have sitting in savings is going backwards. The sharemarket on the other hand has delivered an average long term return or around 9.8% each year.
Whether locally on the ASX or in global markets, your money will be working harder. (Source: Yahoo Finance Australia)
Consider this example: You have $1,000 each month you can use to get ahead. If you were to invest the money into the sharemarket, based on the average returns of 9.8%, over 25 years you’d see this grow to around $1.05 million.
If instead you’d left the money sitting in cash earning 5%, you’d have around $590,000. That’s a difference of over $410,000 from the same money. This shows the reward for taking advantage of compounding growth over the long term.
And with technology like micro investing accounts allowing you to easily get started investing with as little as $5, there’s never been an easier time to get compounding working in your corner.
Getting onto the property ladder has never been harder, but it’s also never been more important. Over the past two decades, house prices have grown significantly faster than wages. The typical home has gone from around four times the average income in the early 2000s to over eight times today – and as high as nearly ten times income in Sydney. That means every year you wait, the gap has become harder to close.
Owning property flips this equation in your favour. Instead of fighting rising prices, you benefit from them. Your property equity grows along with the market, which then becomes a foundation you can leverage further into more investments. Even if you start small, owning something (even anything) puts you on the right side of the rising Aussie property market.
Earning $120,000 once meant freedom. Today, it just means you’re playing on the hardest level of financial Tetris – balancing tax, the cost of living, and trying to get ahead all at once.
But all hope is not lost. The people that end up ahead aren’t necessarily those with the biggest incomes, but the people that make the smartest use of what they have. Spend less than you earn, invest into assets that grow faster than inflation, and get into the property market as soon as you can.
You can’t control the tax rates or Australia’s housing policy, but you can control how effectively your income works for you. Six figures might not make you rich any more, but with the right moves – it can still make you free.
Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben’s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon | Audiobook.
If you want some help with your money and investing, you can book a call with Pivot Wealth here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
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