Back to basics...

Recently we were interviewed by the Domain Group for an article on saving for your first home deposit. Since the article was released, I’ve received quite a few emails asking for further information on tips to not only save for your first deposit, but also how to leverage into further property. Our contribution to the article was fairly brief, so I feel it’s important to provide some further insight into both of these areas.

Before I begin, as always it’s very important to ensure that anything you read with regard to property investment – or indeed, any sort of financial advice – is taken in context of your own personal situation and risk profile, including the information you’re about to read! What works in a general context and has worked very well for a lot of investors, myself included, may not be the best way for everyone.

Everyone’s life situation and investment goals are different and you should first consider your position with respect to these when deciding how aggressive or passive you want to be with your financial strategy.

Increasing your cash balance requires one of two things (or a combination of both) – cutting costs or increasing revenue. Sounds like business talk? It is! To become successful in property investing (read: wealth creation) you must first think of it like a business and develop good habits, whilst possibly breaking bad ones.

As humans, we are creatures of habit and resist change. However, the good news is that this trait can actually be used to your advantage. Once you overcome the bad habits and create new ones that positively impact your financial goals, you’ll discover it’s actually not that hard to maintain.

When you speak to people who have turned their finances around, they report that seeing their savings grow actually gives them the exact same pleasure “hit” that causes people to engage in the retail therapy that causes the problems in the first place…but with a much more positive result!

1. Spend less than you earn. This sounds simple enough until you realise that most people generally know what they earn, but have no idea how much they’re spending. For example, spending $4.00 per day on a coffee equates to $1,460 a year. This means that (assuming a 32.5% marginal tax rate), someone would need to earn almost $2,200 a year just to pay their coffee bill. If you’re earning say, $70,000 a year, this is about 3% of your gross yearly income…just to buy coffee!

Add in any number of discretionary spend items, plus the cost of living, and it’s easy to see why some people struggle to spend less than they earn. Create a budget, get some numbers down on paper and start to work through where your money is going every month…which leads me to my next point.

2. Pay yourself first. This premise can be found in a number of wealth creation books but assists in conquering most people’s lack of ability to save. If you view your savings like a bill and one you must pay (which initially at least, will require some discipline), you will find the savings are essentially forced.

When you are paid, transfer money for rent, pay your phone bill, etc. and also pay your savings bill into a separate bank account. Learn to live off what is left and all of a sudden, your savings account will grow. The best part is that you almost certainly won’t notice the difference (you’ll have to trust me until you do it)!

A good rule of thumb is to save 10% of your gross income. In time, it will become habitual which, as already discussed, is a huge barrier broken when it comes to wealth creation.

3. Find alternate sources of income. When I was about eight years old, my Dad grew Roma tomatoes in the garden and there were so many of them, my brother and I decided to put them into bags and sell them to the neighbours. Years later in early high school, I discovered that by buying Push-Pops in bulk, I could sell them at a significant margin (at times 400%!) to the kids at school. In my early 20s after our plasma TV broke and it was too heavy to carry downstairs, I took a photo and put it on Ebay for $1.00 in the hope that someone would come and pick it up and carry it downstairs for me. To my absolute disbelief it sold for $202.50 (and yes, they also carried it downstairs)! Needless to say, I started to spend some time looking for broken TVs on kerbs everywhere.

The point is that there are always money to be made if you think outside the box and get creative. Do you have a specific skill you can charge your time for? Is your garage (or your friends’/parents’) a gold mine waiting to be listed on Gumtree? Ideally, your income will increase yearly in your chosen career, however the mistake most people make is raising their expenditure to meet it (see point 1).

Remember, we’re talking about a specific saving goal, not a life time of scrounging, so any alternate source of money that you can implement does not necessarily have to be sustainable, it just has to accelerate your savings goal.

4. Consider using Lenders Mortgage Insurance. This is a touchy subject as it once again depends on not only your personal risk profile, but also the type of purchase. For home buyers, it is generally advisable to have a 20% deposit to avoid LMI as the cost of it is not tax deductible as it is for investors. However, you should also consider your savings rate versus the rate at which the market is rising. If you are saving say, $2,000 per month but the market is rising $5,000 per month on your target price range (as it was in Sydney in recent years), you may be better off using a smaller deposit and getting in earlier.

This strategy requires a significant number of considerations – the size of your mortgage will be larger meaning your monthly payment will be bigger, the Loan Value Ratio (LVR) of your property will be higher meaning you are geared to a higher level thereby increasing your risk, you have effectively “paid more” for the property as the LMI is added onto your loan and your interest rate risk is also higher given the increased size of your mortgage.

All these aspects should be considered and discussed with your financial adviser, QPIA and accountant prior to making a decision. Remembering though, that the reason you’re using it is that if you don’t, at some point most of those factors will come into effect anyway if the price of the property continues to climb, even if you manage to save the full 20% deposit.

5. Get rid of your credit cards. As with point 1, if you’re spending more than you earn then by default, you are living on credit. When you spend $50 on dinner, you can now add the credit card interest payment onto that, meaning it could potentially cost you $60 over a year if you don’t pay it off (assuming 20% interest which isn’t unheard of) – and how many dinners are you buying in a year? That $2,000 holiday? It’s now $2,400 and you got absolutely nothing for your extra $400 payment. Remember, this is all after tax money too.

The worst part is that you have to pay it back at some point so delaying action is futile. If you have any savings at all, pay your credit card off then get rid of it and start to implement point 2.

Unfortunately most people’s desire to “keep up with the Jones’” becomes their financial downfall as they spend money they literally don’t have. “Needing a credit card” to make in-store or online purchases is no longer a reason either as all modern debit cards can be used in exactly the same way, you’re just using your own money instead.

Credit cards have their place once you have established financial discipline and can actually be a tool to save money on your mortgage and improve your cash flow (a completely separate topic) if used properly. However it is impossible to save money if you are continually living on credit and unable to pay it off. Do the hard yards now and start to get ahead in your finances.

Of course, for many people on this forum reading this, the majority of it is probably second nature. Even so, it's always important to revisit the basics on occasion to confirm your system and possibly pick up something else along the way. Hopefully you have so thanks for taking the time to read!

 

I created this thread a while back and got plenty of amazing input. Some real gold in here;

Money Hacks

 

I remember reading that! Great stuff and exactly what this property community is all about!

 

Point 1 and 3 is brilliant

 

Great story about the TV!

 

Good points! I might add that owning three cars is expensive so I'm going to get rid of one.

 

Buy food in the food court close to closing time (you do run the risk of possible food poisoning), buy items from the supermarket close to expiry date, road trips rather than overseas trips, don't buy val day gifts just before val day and/or get the present delivered a day before and advise the partner it was due to the possible high error rate on the date (you save 50% on delivery) and encourage the partner to rise through the corporate ladder with there theres.

 

Pay yourself 1st - A very important strategy - never been into budgeting as such but have always allocated a regular amount to be put away never to be touched for consumption. These funds over the years have been directed to paying off PPOR, paying down IP loan, super, buying shares, etc. If anything sold in that period the funds were re-directed to another asset, never consumed.

This approach has allowed for many investment mistakes / poor decisions over the years yet still being in a reasonable position.

Putting away a regular amount to perpetual investment allows for the balance of income to be spent without guilt and provides a balance to life IMO.

These days I don't look for the ultimate investment strategy just the line of best fit when balancing all the things in life. Close enough is good enough for me when it comes to investing.

My advice to any new investor would be to learn as much as you reasonably can about the 4 assets classes, put away a set % of income, don't ever touch it for personal consumption and let it grow, don't gear too heavily and let compounding / the markets do their work for you over time.

All the best

 

My all time favorite books is "Richest man from Babylon" and "Millionaire next door" which covers all these principals and plus more. As the good old saying goes "Knowledge is power" so the more you have of it, the more you can wield it to your desire. As a side note, watching trashy reality television does nothing for you but probably rob you of essential IQ points and time to learn anything meaningful.

 

Dumping the P76 might be worthwhile if you palm it off through Shannons. Maybe you can get 50 or 60k for it, assuming that you get it reupholstered, repainted and get the VIN put back on it...

 

The P76 had the largest boot in history. Imagine how many slabs of beer you can fit in there!

A true bogan car!

 

Millionaire Next Door is a great read, as is Barefoot Investor.

Only problem with Barefoot is I already do almost everything in the book so there was no way for me to streamline my finances.

It was so good thought that I bought two copies and gave them to people I work with that have asked me financial questions/ I thought they could use the advice (think I have mentioned this on another post here)

 

can't believe people need to be told that. do we need to read an article about how bad credit cards are?

 

Finally I have someone that agrees that LMI can be a friend!

Capitalise it and make use of your remaining liquid cash to invest elsewhere / blow on booze

 

Recently going on a culling spree to cut costs on several things in my life. Bought a Nespresso machine to avoid buying from the cafe which saves a bundle as it's only $0.68 per coffee, negotiated on better home loan rates, negotiated on my insurance policies, opened ING account with no fees attached to the account, negotiated my car insurance, avoid eating in hipstar places, asked the boss for a pay increase and cut back on my mobile phone bill.

 

And to add to more of my recent culling, saved $50 per month on my mobile phone bill! Kinda funny that I had to upgrade my phone in order to make the saving to the new plan. Tried to see if I could make any saving from my private health insurance, but couldn't really see a saving there and the old plan ended up being better than the new ones that they are offering. But of course to maximise any perks with the private health insurance in shoes, gym and etc. On the verge of getting rid of my credit card because sick of making the bank rich and tried to negotiate a better rate but they (CBA) said no.

 

Double-edged sword.
I have been saved financially by having CC's numerous times during 30 odd years in the working/investing adult world.
First time was the first car, when the motor blew up and I was broke. CC cash advance came to the rescue to get it on the road again so I could get to work.

 

My switch to nbn will save me from $150-300 a month!
Haven't touched a cc for 20 years.

 

I do feel that even the most experienced investors do seem to get complacent over time and are not on top of savings that could be made by finding ways to save money.

Really happy to hear about your $150 to 300 saving! That's enormous!!!