Australian Federal politicians currently receive a minimum salary of $211,000 before tax. That’s $5,334 per fortnight net of tax. It is significantly more than the average wage which is more than double the average full-time salary.
Despite this generous remuneration there have been multiple instances of politicians complaining about their difficulty in surviving on this wage:
- Barnaby Joyce just claimed he is counting pennies on a $211K salary — but he actually earns much more
- Tony Abbott’s mortgage stress back on the agenda
- Lucy Gichuhi says $200,000 salary is ‘not a lot of money’
No doubt there have been many other similarly remunerated people who have felt the same and kept it to themselves.
So, what gives?
How is it that people earning very large amounts of money cannot manage their finances appropriately?
Failure to budget
One of the reasons cited was the high cost of paying a mortgage. This is a commitment that is not easy to reduce once it has started. Loan repayments can also increase unexpectedly when interest rates go up.
It is easy to spend money on credit cards that you cannot actually afford. A huge amount of marketing effort is put into encouraging people to buy things that they don’t need. It’s not easy to resist those impulses when you don’t feel like you need to worry about how you spend your money.
Assuming that the good times will last forever
It’s common human behaviour to extrapolate results and assume that the current trend will continue indefinitely. It is very hard for humans to contemplate the ups and downs of economic cycles and how they impact our personal life.
Unexpected reduction in earnings
This can be caused by many things such as redundancy or severe illnesses. It’s something is more commone for older workers.
Income Protection insurance can help but it wont cover everything.
What can you do to avoid falling into the same trap?
- Don’t make financial commitments that wont be sustainable in a worst case scenario.
- Start a forced savings plan and stick to it during the good times.
- Get covered with Income Protection insurance.
- Avoid using credit for temporary lifestyle spending (eg holidays).
- Use bonuses and pay rises to pay down your mortgage faster and build up a redraw facility.
- If you don’t have a mortgage keep an emergency cash reserve of at least 3 months net salary.