Positive cash flow - goal to earn 30k a year.

Hi there, new to the propertychat forums. Am looking for strategies to increase my overall cash flow situation, as I'm currently a middle class single income worker with a wife and one child (dependent). Both me and my partner in our late 20's.


My current situation is:
- Single income household earning about 60000 after tax.
- I have a 250k homeloan on a 650k PPOR that is being paid off. Currently at 3.7% variable interest rate, costing me about 14k a year
- Family has a weekly expenditure of about 15k per year currently. Though I generally budget for 20k a year.
- This leaves me with net positive cash flow of 25-30k per year of savings and an outgoing of about 30-35k.

My initial goal is to have my investment cash flow cover all of my expenditure, so that I am financially independant and can quit the rat race at any time or at least have the mental freedom of not needing a salary anymore. I want to accomplish this in 10 years, hence I am looking for higher yield / cash flow versus capital growth.


Question I have is, with the goal of increasing my cash flow, should I pay down PPOR debt or invest? If I should invest, what should I invest in that would provide high yield, with the goal of increasing my cashflow to allow me to take on bigger capital gains assets.

Thanks for the help and advice

 

Hey Barduck,
Firstly, great work putting yourself out there and asking these questions early on, especially as a couple.

So 2 ways to look at it:

1. How much:
To work out how much you need to have invested at a conservative 4% ROI, multiply by 25.

Aim $30k cashflow.
$30k x 25 = $750k in invested assets (does not include PPOR).

That's the goal. How can your next move get you there? What investment vehicle would work best.

2. How quick:
To see how to get there in 10 years, look at the table on the attached site.

https://momanddadmoney.com/wp-content/uploads/2014/09/years-until-retirement.jpg

You seem to be saving about 50% of your income. That means it will take 17 years to reach your 'passive' income goal assuming you maintain that.

To reach it in 10 years, you need to save 65%+. Either by cutting expenses, or increasing your income.

Many people focus on investing whilst having a weak defence.

To reach your goal you need a strong defence (savings rate) more so than a good offence (income). You need to get the former right for the latter to really make an impact.

Life will throw curve balls at you, and from experience, passive income is not so passive.

Will write a post to explain this further this weekend. Had someone ask me the same question an hour ago.

 

both by debt recycling

 

Working out How Many Properties are Needed to Reach you Goal Working out How Many Properties are Needed to Reach you Goal

 

Cool - that makes sense, so I would need roughly two properties worth 400k each fully paid off earning me a conservative 4% a year. To accomplish this over 10 years, I'd have to pay off 400k is 5 years, which is 80k a year. I can only pay in a max of 30k a year. So basically its realistic that I'd have 12k a year passive income not 30k a year in 10 years. That sucks.

The point about reducing my spending, I think I couldn't really reduce my spending down much more than another 1.5k a year, if I didn't park at the train station and instead used the bus, and I cut out a daily coffee which I buy (thats about the only thing I have that I would consider a non-essential). I only buy stuff on sale, and never eat out, only cook from scratch. We lead a fairly minimalist lifestyle as it is and 15k expenditure per year for a family of 3 is basically super low by most standards.

Debt recycling is all well and good, but I need an investment that is still net cashflow positive to be able to pay it off.


Next part of the question would be what would I invest in that would give me a yield greater than the total loan borrowing for the intended IPs and PPOR. I'd be looking for a gross yield greater than 6% per year. That way I am never making my cashflow situation worse in theory.

Thanks

 

Don't forget capital gains.

You might need 2 properties fully paid off, but to get there quicker you could buy 4 and later sell 2.
Capital gains are taxed at less than half of a wage income and there is no as much physical effort needed.

 

So difficult to get this right! Appreciate the tips, thanks anyways. Coming up with a plan seems impossibly tough, I know what I want, but the steps to take, what to invest in, and how to reach the goal seems much less clear.

 

How do you eat an elephant? One bite at a time.

Only in mythology does David kill Goliath with a sling-shot. It is more likely you will be building an arsenal of unfathomable skill-sets over the next 10 years to tackle your stated goal. Terry_W's very doable one-liner is backed by decades of knowledge gained from taking consistent action. Some on this forum have become so wisdomous, merely stepping on barren earth causes towering trees of knowledge to sprout as they walk. Be respectful, ask questions, and learn from them.

The investment path has less to do with making money, and more to do with personal growth.
Breaking and forming new belief systems. Falling over 1000 times, and having it only count if you get up 1001.

For example:

The you now on September 20, 2018 can only pay in a max of $30k/yr. The you on September 20, 2021 may be able to pay in a max of $100k/yr. That comes down to the consistent thoughtful effort you put in between now and then, and your GRIT.

What's that saying... "if you do what you've always done, you will get what you've always gotten". I see a lot of this amongst investors. The world owes you nothing, you want to get ahead, you need to work 10x harder to get twice as far (even that's a maybe).

Break it Down:
Don't stare at right at the sun.
Break down your 'passive income' goals to smaller chunks.

Visualise climbing a mountain.

Ground Base: Build up your buffer, created by good habits of paying yourself first.
1st Base: Replace 100% of your need expenses (food, shelter, basic clothes)
2nd Base: Replace 50% of your luxury expenses (ipad, mobile phone, internet, etc)
3rd Base: Replace 100% of your luxury expenses (travel, etc)
Summit: Have surplus (donate to charity, help out family, etc)

Focus on ground base first, then 1st base, so-on and so-forth.

@sash definitely has a different opinion to me on this one.
Unless your plan is to hit your goal when you are 65, you need to steer away from this talk of passive income, $300k logan property with $310/wk rent.

That sort of investing works as a means to park the ridiculous amounts of money you make from say a business, or a high paying PayG.

Learn to be an active investor. Development/Sub-division/Renovations, etc. Then when you have some spare change lying around, feel free to buy and smash down some 6%+ yield properties. This won't happen over-night, but it will happen.

Read:
- Richest Man in Babylon by George Samule Clason
- Millionaire Next Door by Thomas J. Stanley
- The Slight Edge by Jeff Olson

Get your defence automised first.

Also you may enjoy reading Mr. Money Mustache
He may be relatable to what you are trying to accomplish.

 

You've got two option with these figures.
Either you want 30k/yr because you still have your mortgage of 14k, plus your expenditure of 15k.
But what if you pay off your mortgage? Will you still need your investments paying you $30k?

That's a pretty common mistake people make when trying to calculate their financial independence needs. A lot of the time people think "hey I want a passive income of $60k" to match their current wages, but if you've paid off your house in retirement (early or otherwise), what are you going to do with all the extra cash?

Since you seem to be living quite comfortably on your lean spending, I'd suggest giving this reddit a read
Financial Independence Australia

Also look at Mr. Money Mustache (MMM) (whoops, NHG beat me to it )

 

Thanks for that! Thats very true, I'd probably get by on 15-20k per year as a first goal, assuming I'd have paid off my mortgage. Not sure I want to completely retire just yet. But it would be nice to say, have enough to cover my expenses should I lose my job, or choose to take a year off work to go after a business endevour etc.

Yea I think i would definitely be the type of person to subscribe to financial independence sort of lifestyle

 

You need CG and asap. Just focus on good deals in good areas. That's the only way you'll be able to eventually sell down to realize that CF. Its all about the equity to grow/develop.

Increase your serviceability if possible. That will be the driving engine behind building your portfolio faster which will build your equity faster which will then (hopefully) let you realize the CF faster.

 

That’s just buying at the wrong time in the cycle in logan. Early in this cycle it was buy at $220-230k in Logan with $310/wk rent. Now prices are $300k and yields are back down near 5%. It’s closer to sell time, or wait for the next cycle or buy somewhere else.. buying in 2013/14 meant 7% yeilds and some quick return growth early on. Doesn’t stack up that way now.

 

Have properties really gone up that much in the last 5 or so years?

 

In some areas they have

 

In logan?

 

@Terry_w Looks like peanuts to me.

LOGAN:

 

Two big assumptions here. That you can live on 30k a year for life, and that you dont hit a market event that wipes 20% off (temporarily) and you cant make it back.

 

edited my post

 

NHG....ya not hearing what I said....despite me trying to communicate my point.

Here are dem rules:

1. For financial independence and passive income...people can hit it in 15-20 years so long as their expectations are modest - i..e 40-70k per annum.

2. Equity is more sustainable than income where where you need to exert effort.

3. I can quite today...but the other issue is what to do with the time....I have enough for passive income to replace my current earning...

4. Read the FIRE posts of people like Money Moustache...Retireby40...and ..Go Curry Cracker...despite them saying they retired in USD28k like Mr Money Moustache...they fail to mention some of their blogs return up USD 150k per annum

5. Finally....I will leave with "When the student is ready the teacher appears".....

So despite all the visualization ....ideas...and entrepreneurship...ya won't get there without a clear goal...something to think about....

 

Reaching financial independance doesn't necessarily mean that the person will never earn any money again, outside of their investments.

Just reaching the amount of your annual expenditure is the first step.