10% rule

[Andrew_A]

I'm interested how people 'Pay themselves first'.

For many years I have struggled with accounting for every purchase in my life, and come back to the basic understanding that the age old truth of 'paying yourself first' is really all that you need to do in terms of budgeting.

How do you lock 10% (more?) of your cash turnover away for the longer term?

I imagine for many property investors it would be saving for their next deposit.

[Sim]

Take on more investment debt.

[Andrew_A]

Take on more investment debt.But this is a longer term idea. In the mean time how do you lock the money away from the demands of every day life?

What I'm interested in is the truth that I have noticed in my own life that my expenses rise to meet my income, and it's much easier to raise them than to reduce them!

For me my best idea would be to put my 10% in an offset account against my non-deductable debt, I'm considering regular investments into CPT's and the like but haven't come up with a genius idea as yet. I have plenty of liquid investments at the moment, but nothing that is safe from consumption demands as such :)

[Tim]

I have saved 10% of my income for about 10 years now, after reading the principle of paying yourself first in the "Richest Man in Babylon". I have tended to automatically have the money transferred from my salary to a "notice of withdrawl" savings account, and then use it in varying ways, anything from terms deposits, shares, managed funds, to fund deposits for property etc.

I think it matters more that you do this as a principel for psychological reasons than the exact manner in which you invest it in, although both are important of course.

Tim

[Rolf Latham]

Hiya

Do PAYG and Co tax witholding count as investments :O)


ta

rolf

[pete_w]

i tend to count my super (9%) as the 10% i pay myself. dont have much choice anyway :)

another thing i do is have 2 bank accounts. 1 i get paid into (now earning ok interest for cash) that i can only access online, and another one that has an atm card/cheque book etc. once a week using online banking i transfer a set amount from the account i get paid into to the account i can access via atm, and thats how much ill spend that week. i have a budget and allocate a certain % for "slush" that i spend on whatever tickles my fancy, with other %'s going towards bills and transport, etc. that way i can impusle buy or have a big night out now and then and not feel guilty about dipping into my savings. ive been doing it for a few years now and it works quite well.

[Sim]

Essentially they key is to move it away from your operating accounts as soon as possible in the pay/bills cycle.

Ideally, if you are a PAYG employee - see if you can split your pay into multiple accounts so part of it never even hits your operating account. I've done this for years - works really well.

The tricks are:

1. have a single operating account that your pay (minus "pay yourself first" funds) goes into, and ALL bills come out of - including credit card payments and personal debt payments.

2. have a separate account that you do not normally have access to (especially not via ATM card) - and just ignore it. ING Direct and Cash Management accounts work well for this kind of thing.

3. (the most important part) - learn to live on what goes into your operating account. If you can't, you're either spending too much money, or you're setting aside too much money, or both !

We currently use a combination of methods - first, my wife puts aside a set amount each month into an ING Direct account which is called the "Ultimate Holiday Fund" (nice being able to name your accounts !!). Secondly, I put aside each month (directly out of my pay, so I never see it), money into my trust account to help with cashflow for my trust investments (trust actually makes money, but some of the managed fund distributions are automatically reinvested, so I need extra capital to aid with short term cashflow - any surplus is invested).

The trick, and discipline, is in learning to live on only what goes into and out of your operating account. If you can truely hide the other money from yourself, you will learn to live without it - you will get to the point that you don't even miss it.

[burstock]

The way that worked for me to getthe 10% set aside was twofold, auto deduction to a managed fund investment with Colonial. After I started to reduce my exp's down to live on the 90%, I did it again, 10% transferred automatically every month to an ING account. So I have cash I can get at if required and managed funds that are also accessable, but not immediately.

[MichaelW]

The way that worked for me to getthe 10% set aside was twofold, auto deduction to a managed fund investment with Colonial. After I started to reduce my exp's down to live on the 90%, I did it again, 10% transferred automatically every month to an ING account. So I have cash I can get at if required and managed funds that are also accessable, but not immediately.Burstock,

Welcome! And nice post to lead off with too...

What you're doing there is precisely what John Burley would advocate in his book "Money Secrets of the Rich". He calls this level 4 investing and requires an Automatic Investment Plan (AIP). 10% is a nice start and he suggests using some sort of managed fund to do this with initially.

Its a great start, and gets you used to investing automatically. Otherwise, its far too easy to "pay everyone else" first and invest what's left (invariably nothing).

Welcome again,
Michael.

[alexlee]

Personally, I've never agreed with the 10% rule. Surely 10% isn't enough?
Alex

[TomL]

Its an absolutely mind boggling amount to someone that is living day-to-day, maxed out credit cards and no prospects for the future.

Me - I started with 10% of Net after tax (just my salary) about 8 years ago. This then progrssively shifted where nowdays we put away for investment 30% of our combined gross incomes, and live on the rest.

Eventually the situation will actually reverse - the investment portfolio will sustain and feed itself, and we will be drawing a % for living :D

T.

[Sim]

Agree - 10% is just a starting point.

[keithj]

Personally, I've never agreed with the 10% rule. Surely 10% isn't enough?Depends what stage of investing you're at. In the early & mid stages, the answer is 'as much as possible'. After accumulating assets, any savings become insignificant compared to growth, so the answer is 0%.

[alexlee]

So if 10% is difficult to achieve for most people, and yet if you run the numbers you find that even if you just save 10% and invest diligently at a reasonable return, you build up a good nest egg.

That would imply if you save 20% or 30% or 50% or whatever of your net (sorry, I calculate my savings rate based on net) the results become exponentially higher, right?
Alex

[Bear924]

I pay my set % rate directly into my PPOR home loan. Before I had a PPOR I was using a savings account which would direct debit from my transaction account without any fees every payday. Before that I would walk to the various banks every Friday and pay the money into each account as required. The biggest factor is not to purchase doodads with the money you accumulate, every doodad costs you money to own and maintain... thus creating higher living expenses. One of my biggest investment revelations was to realise that most 'assets' as actually liabilities that cost you money on an ongoing basis. Be as fussy as possible in determining what doodads you buy and get rid of them if you aren't using them as often as you think you should.

[see_change]

I'm interested how people 'Pay themselves first'.

For many years I have struggled with accounting for every purchase in my life, and come back to the basic understanding that the age old truth of 'paying yourself first' is really all that you need to do in terms of budgeting.
.

Andrew , When you say this , are you actually documenting all your expenses in a program and then printing out a summary of what you are spending on what.

Apart from a brief period when we first got married I don't think I've ever saved , and even then I think it was my wife who did it...

In the last year we've started documenting everything we spend, and I've found that the discipline of doing that is a good starting point with cutting down expenses. Once we've seen where the money is going then we can make decisions on where we can cut and how much we spend on what.

See Change

[Andrew_A]

Andrew , When you say this , are you actually documenting all your expenses in a program and then printing out a summary of what you are spending on what.

Apart from a brief period when we first got married I don't think I've ever saved , and even then I think it was my wife who did it...

In the last year we've started documenting everything we spend, and I've found that the discipline of doing that is a good starting point with cutting down expenses. Once we've seen where the money is going then we can make decisions on where we can cut and how much we spend on what.

See ChangeAll my expenses for years were written down in a notepad, then quarterly I would compile them into Excel and split them into categories. I think for my own personality this approach doesn't work as well as just 'paying myself and my investments first' and living off the rest.

[TomL]

A I think for my own personality this approach doesn't work as well as just 'paying myself and my investments first' and living off the rest.

Amen to that ... i'm too lazy to bother writing down every expense, compiling them, analysing etc etc.

I find it much easier to simply define my plans, work backwards to see how much $$ i should be putting in to achieve them, then spend the rest. Every year I tweak the % for savings.

Too easy.

My time is better spent elsewhere, and I would hate to put pressure on myself - having to always rationalise if I should spend money or not. My way I can spend it without ever having to feel bad about it.

T.

[Corsa]

Dear Andrew

Great question :)

I have been saving 10% for around 6 years now and started off by not giving myself payrises as I agree that overtime with payrises and all, your lifestyle just "adjusts" and the pay rise disappears.

In addition to the 10%, I now also set aside 20% for investing and effectively live off 70% of my income.

I go with Sim's approach, 10% into a "hard to get to" account that doesnt sit in your netbank option list for transferring :) , and then I split my pay into 3 accounts, 1 for Household expenditure, 1 for investment expenditure (bank loans plus investment costs) and 1 for personal, and each month all these accounts get depleted to 0 and "the good life" usually lasts for as long as there is money in these accounts, after that I wait until the next payday but usually I can make it go the distance which at the moment is monthly paychecks.

Good luck trying to set up a scenario that works for you

Best Wishes

Corsa

[gniks]

The John Burley method is not only 10% of gross income automatically invested, but it must be invested in assets that will generate 12-15%+ pa returns in the long run. If you don't want to have a niche in shares or managed funds etc he recommends just using an index fund. It is not a holiday fund or doodad fund, it is never touched.

However he also recommends taking another 10% of your gross income and adding this to the minimum repayment on any "bad debt" ie home, car, credit card, personal loan etc. (one at a time) and pay them off within 3-7 years by doing that. When you've extinguished bad debt you add that 10% to your AIP.

He also recommends 10% of gross income to charitable donations, and then live off the other 70% of gross. That way you don't have to do a budget, you can spend all of the 70%.

gniks

[NigelW]

The John Burley method is not only 10% of gross income automatically invested, but it must be invested in assets that will generate 12-15%+ pa returns in the long run. If you don't want to have a niche in shares or managed funds etc he recommends just using an index fund. It is not a holiday fund or doodad fund, it is never touched.

However he also recommends taking another 10% of your gross income and adding this to the minimum repayment on any "bad debt" ie home, car, credit card, personal loan etc. (one at a time) and pay them off within 3-7 years by doing that. When you've extinguished bad debt you add that 10% to your AIP.

He also recommends 10% of gross income to charitable donations, and then live off the other 70% of gross. That way you don't have to do a budget, you can spend all of the 70%.

gniks

I think if you're young and still living at home then you should be saving 50-80% of your after tax income.

If you're acquiring growth assets then it becomes a question of balancing investing for the future and spending for lifestyle...Where you strike that balance is probably a function of your timeframe for having the freedom to choose whether you keep your "job".

Some months are expensive ones, but if your investing expenditure amount (especially interest) doesn't at least equal your household spending then you need more good debt and less doodads... :D

ps. I'm just stirring the pot here...gearing should always be sensibly considered within your overall strategy... ;)

[Aceyducey]

So if 10% is difficult to achieve for most people, and yet if you run the numbers you find that even if you just save 10% and invest diligently at a reasonable return, you build up a good nest egg.

That would imply if you save 20% or 30% or 50% or whatever of your net (sorry, I calculate my savings rate based on net) the results become exponentially higher, right?

10% isn't difficult for most people to achieve. It's simply less important to them then their chosen way of spending money.

It's simply priorities and choices.

If you invest the money you save the returns can grow exponentially, yes. They can also shrink exponentially - a good self-education in investing is also important. Just being a saver isn't a wealth strategy.

Cheers,

Aceyducey

[Merovingian]

I think if you're young and still living at home then you should be saving 50-80% of your after tax income.

This is my plan. I plan to save 50% of my after tax income, and then for the rest, 25% goes to living expenses and 25% goes to spending. Anything left over from expenses and spending at the end of a given month would be added to the savings part. To that end, more than 55% should be realistically achieved.

For an after-tax income of $29,000, in one year $15,950 would be saved, and in two years, $31,900...

[Lplate]

I reckon the best thing a young person can do is have the paymaster deduct 10% of pre-tax pay and deposit it in (say) a credit union a/c. At regular intervals a set sum is taken from the a/c and invested in a managed fund (or whatever).

It's not a bad idea for a grandparent to seed the process by putting in a lump sum (say) $1k.

Deducting much more than 10% from what is already a low income (in many cases) could result in the opposite effect - the 'saver' feels deprived and does not continue the arrangement.

LPlate

[thefirstbruce]

Hi A



things I didn't have when I was 25....
a mobile phone
designer clothes
a newish car
a cd collection
an appetite for restaurants and coffee shops
wealth creation seminars
4 and 5 star motel taste
expensive OS holidays



things i had instead
I surfed
I ran
I revolved dinner at friends' places...nothing fancy, just cheap andn healthy Sat dinner with friends.
I grew veges and herbs
I read a lot of books from public libraries
I helped relies renovate houses
I had uncles and a father who understood money
I loved staying in a caravan within ear shot of the surf
a backpack and a list of YHA hostels :)


things I wish I had now and then
a passion for an occupation that makes me lots of money....harder to spend money when you are at work....

[The Y-man]

We pretty much went the managed fund method - just acted as a separate "store" for capital, and it performed better than a bank account.


Cheers,

The Y-man

[DD1]

Gee guys it all seems pretty heady in here and most of you all are very stringent with savings. I have no idea how much is where, goes where or should be left, if ever whatever.

I have a rough idea about finances but think to analyse it too much is to micro manage and maybe not see the wider picture.

I congratulate you all for being so diligent. Since I moved last year I have become even more relaxed with not even a watch on my wrist. My tan line has now disappeared.

Sorry guys to rain on the parade, but if you spend as much time in researching property deals as you all seem to spend on budgeting and squeezing a finite liquidity situation, wouldnt you be better off aggressively seeking property and doing deals rather than the fine tuning to the last $10.00.

I actually had a quiet year last year but find now I am busier with sourcing deals for people, while others read reports and say "what if" and "maybe", I am finding out more info and keeping knowledgable about areas if interest.

I suppose all im trying to say is be a bit more gung ho on property deals and less on account keeping and you might just find its all a bit of a different perspective in a few years with a few successes on board.

Happy hunting all.

DD1

[Lplate]

[snip]

In the last year we've started documenting everything we spend, and I've found that the discipline of doing that is a good starting point with cutting down expenses. Once we've seen where the money is going then we can make decisions on where we can cut and how much we spend on what.

See Change

See Change
I reckon this is a really worthwhile exercise because discretionary expenditure (lifestyle stuff) has a habit of becoming perceived as non-discretionary expenditure if not challenged early enough.

For example, it is amazing how the advertisers have been able to persuade consumers into heavy use and frequent up-grading of communications and entertainment technology.

I think the only way is up-front control - allocate pre-determined sums from fortnightly pay for household budget and for discretionary expenditure.

In a previous thread I asked for feedback from people with families who had worked out a budget. Very few had done it.
LPlate

[kissfan]

For an after-tax income of $29,000, in one year $15,950 would be saved, and in two years, $31,900...Hi Merovingian.

What about interest (at least), or dividends etc if that money is put into a managed fund or something of the like. Start thinking compound interest.
Don't just rely on your savings. Get your money to work for you.

Regards
Marty

[Sim]

Sorry guys to rain on the parade, but if you spend as much time in researching property deals as you all seem to spend on budgeting and squeezing a finite liquidity situation, wouldnt you be better off aggressively seeking property and doing deals rather than the fine tuning to the last $10.00.

While I agree with the sentiment DD1 (there is a point of diminishing returns where accounting to the last dollar doesn't really gain you any more)... I think you are missing two key points here DD1.

Firstly, for people starting out who don't have an asset base or even a decent cashflow, the very first step they need to make in order to be able to get into the property market is 1) save a deposit for their first property, and 2) make sure they have enough surplus income to be able to service the debt if it is cashflow negative. That's actually easier said than done for the vast majority of the population, and savings discipline is the only realistic way to start (if they could earn more money, they already would be, so it's a moot point).

Secondly, when you are leveraged to the maximum, fully invested and utilising all your surplus income to service your investment debt, you'd want to be doing two things pretty well... 1) understanding your living expenses versus your investment expenses to make sure that you are actually going to have enough money to do both, and 2) trying to determine whether there are any areas of discretionary expenditure that are actually not that necessary, so that you can increase your surplus cashflow to aid in purchasing more investments.

My two examples are at opposite ends of the extreme - first when starting out, and second when fully invested (although these two points may actually be very close together for some people).

My point is that whilst you are in the middle of this range, concentrating on finding more deals is probably your most useful exercise, but when you can no longer afford to do so, it's time to step back, reassess, and see if you can identify inefficiencies in your cashflow to free up more.

[Bear924]

After reading John Burley's book I decided to start to track all my expenditure and started using Quicken (an old version someone wasn't using so didn't cost me anything). I find it very beneficial to enter this information as it shows that I am moving forward and allows me to decide whether something is costing me too much money or not. For example: I own an older car that is predominatley a hobby, I was considering selling it however I checked through Quicken and found out that I wasn't spending as much on it as I thought I was.

These days I download all my bank statements directly from the internet and then using Quicken I put each transaction into a group, this doesn't really take all that long.

[Merovingian]

What about interest (at least), or dividends etc if that money is put into a managed fund or something of the like. Start thinking compound interest.
Don't just rely on your savings. Get your money to work for you.

I was using cash as an example, though shares or listed property trusts may be a better option for the short to medium term...

[topcropper]

I was fishing with a bloke a few weeks ago, and he seemed to always be having a smoke. He said that he smoked 40 a day! Anyway, no big deal, plenty probably smoke that much, but I felt sorry for him for being addicted to something that will possibly take 15 years off his life. Later on he said his misses was a big smoker too. I still thought nothing of the matter, why would I?

However, later on in the day he mentioned that it cost him and his misses $200 a week for fags!

My jaw hit the floor. Now that is amazing. I had no idea heavy smokers spend that much.

I roughly worked out that $200 a week, invested at 10% compounding in property or the sharemarket would come to $640 000 over just 20 years. Imagine the amount over 40 years! Obviously that money wouldn't buy in 20 years what it would buy now, however, a clever investor would probably do better than 10% as well.

The same would apply to gambling. I know people who have put $20 a week into lotto for 30 years, and probably will the next 20 as well. What would this come to compounding at 10% for 50 years?

Happy to say I don't smoke or gamble, but of course I often drink too much.

See ya's.

[geoffw]

Topcropper

It doesn't matter if he doesn't invest for the long term. He probably won't be around then anyway.

[Gordon Gekko]

These days I download all my bank statements directly from the internet and then using Quicken I put each transaction into a group, this doesn't really take all that long.

Hi Bear,

I trIed the quicken idea but it took too long to enter all transaction. Then i went down the "download transactions" path like you have. But it doesn't put each transaction into a category for you :(

So do you edit each trans???

GG

[Glebe]

I thought it does the next time around. That is if you buy your petrol at the same service station, Quicken will remember that you allocate it to 'motor vehicles' etc. I haven't used Quicken for a while, could be wrong...

[WillG]

Hi Bear,

I trIed the quicken idea but it took too long to enter all transaction. Then i went down the "download transactions" path like you have. But it doesn't put each transaction into a category for you :(

So do you edit each trans???

GG


HI GG,

This is off topic but is investment related.

After reading your Situation, Financial Mission, Execution I am interested to hear how you plan to diversify your assets to '1/3 IPs, 1/3 shares, 1/3 cash' seeing you appear to be 100% IP's at the moment.

I would like to put myself in a similar financial position in a simialr timeframe except would like to procure $2M (net worth) in 15 years

Cheers

[NigelW]

HI GG,

This is off topic but is investment related.

After reading your Situation, Financial Mission, Execution I am interested to hear how you plan to diversify your assets to '1/3 IPs, 1/3 shares, 1/3 cash' seeing you appear to be 100% IP's at the moment.

I would like to put myself in a similar financial position in a simialr timeframe except would like to procure $2M (net worth) in 15 years

Cheers

When you guys all say 1/3 cash...what do you mean by that? I hope that's not as dumb a question as it sounds now that I read it back :o

Surely you won't keep more than $100-$300k in cash for an extended period? The returns are currently too low. Certainly cash is a risk modifier for your investments and you need some to live on...but couldn't you keep that money in liquid investments like direct shares/mgd funds/LPTs/LICs?

Certainly the risk profile is very different but say your net worth was $6m are you REALLY going to be happy getting about 0.5% after inflation on $2m???
As long as you've got say $100-300k readies then that's got to be enough hasn't it?

My point is, as your net worth goes up I think the cash % should go down...

Now if you're taking about cashbond/annuities as one third then again, my question is - should that be the aim or should that just be a tool you use if you need additional servicability? Shouldn't the aim be to have enough income being generated from jobs and/or investments that you don't hit a servicability wall such that you need a cashbond?

Not trying to criticise your goals...just trying to understand them.

Cheers
Nigel.

[see_change]

See Change
I reckon this is a really worthwhile exercise because discretionary expenditure (lifestyle stuff) has a habit of becoming perceived as non-discretionary expenditure if not challenged early enough.

For example, it is amazing how the advertisers have been able to persuade consumers into heavy use and frequent up-grading of communications and entertainment technology.

I think the only way is up-front control - allocate pre-determined sums from fortnightly pay for household budget and for discretionary expenditure.

In a previous thread I asked for feedback from people with families who had worked out a budget. Very few had done it.
LPlate

After documenting our expenses for about one year , we've got around to drawing up a budget. We've done budgets in the past , but we wern't really sure on how much we were spending on what.

I've also found that in order to stick with this we need to be monitoring our expenses on a frequent ( currently weekly ) basis. I know from how we've done things in the past , if we only summarised things every three months, it wouldn't give me ( and my wife ...) the immediate feedback and reinforcement on where the moneys going in order to get us to actually change our spending patterns.

I'm great at planning on what I need to do , but I'm not always that good at following through so a weekly profit and loss statement on our household expenses , and then a monthly summary on our overall structure, including wages , rent mortgages makes sure the overall position is healthy seems to be helping us to keep expenses under control ;) .

See change

[beech]

Absolutely agree with everything SC just said.

We recorded all expenses for about 18 months and you certainly have a stronger hold and feel for where the dollars are going and can adjust accordingly if need be.

Must get back to doing this i think as the more you take on (property)the more you NEED to know where its going. :o

[Rickardo]

Hi all,

I am currently in the saving for my first IP deposit stage.. My current system is to deduct 10% of my gross fornightly salary and place it directly into my high interest bearing e-account. I keep around 5k minimum balance in this account. Once i save about 2.5-3k above this i purchase another share that has a good dividend yield (4-5% before taking franking into account).

This way i systematically save a set amount each week, and given that high yielding shares are generally low(ish) risk capital loss wise, i get to take advantage of dividend imputation while minimising the chances of a capital loss when i eventually have to sell up for my IP purchase.

I then spend a large majority of my net income, and whatever is left over i contribute to my e-account (this can be anywhere from 0-40% of my net income). I realise i should probably be saving more at this early stage however i would like to keep a balance of future investment and currently lifestyle. With the 10% rule i know i'm systematically saving and i will reach my goal eventually, and anything i can save from my net income is a bonus which will help me reach my goal faster.

I also keep a fairly accurate excel spreadsheet which documents all expenses over about $5. I've only been doing this for about 3 months but have found it extremely helpful as i was starting to slip into the 'what the hell did i spend my whole weeks pay on'? mindset. Accounting for my expenses has made me much more aware where my cash is going.

[Andrew_A]

I was thinking of starting a thread on how you 'Pay Yourself First'? as it's still an issue I struggle with, I'm doing OK but certainly nothing special with the compounding yet.

Looking for any fresh ideas people might have with automatic investment plans over the last year.

So I did a search on Ssoft as I had a vague memory that I had read a similar thread before, lo and behold I had.......

** Bump **

[alexlee]

I have to say, my situation has changed a bit. Used to be I controlled my spending so tightly that I saved 40 - 50% net on what's left over.

Since the start of the year, my girlfriend has been studying full time so I've been paying for two. For the first couple of months, I saved around 10% of my net. I've decided that's unacceptable and started putting 20% into a separate savings account on pay day.

I don't imagine it'll get any easier from now on. Even with pay rises, my expenses will increase as I buy an IP, have a family, etc. The lesson here is to save as much as you can NOW, because it's going to get harder.
Alex

[alexlee]

Something that's always resonated with me. I don't know where it comes from so can't give the writer credit:

LIFE STAGES

Age 18 – 25 I can’t invest now. I’m just getting my start in life. I don’t make a lot yet, and I’m entitled to have fun while I am young. I don’t want to look back and feel like I wasted my youth, you know? My friends are planning an overseas trip and I’m going to get myself a new car. There is plenty of time. Wait until I start making a little more. Then I’ll invest.

Age 25 – 35 I can’t invest now. The car registration is due and we still have credit card bills owing from our last holiday. I’ve got a growing family on my hands. Children and a house cost a lot of money you know. It takes all I have to keep them going. As soon as they are a little older, it’ll cost less. Next year I’ll make manager and get a big payrise. Then I’ll have lots of spare money to invest, you’ll see!

Age 35 – 50 I can’t invest now. I’ve got two children in high school. It’s all I can do to pay their expenses. In fact, I had to borrow to pay their school fees last year. This is the most expensive period in a person’s life. Jobs aren’t safe anymore, you know. Every cent I can spare goes into the mortgage: I want to at least have a place to live if I ever get downsized.

Age 50 – 65 I can’t invest now. I know I should, but things aren’t as easy as they used to be. My car is so old now that it costs a lot in maintenance. It’s not easy for a person my age to step out and get a better job, you know. I’ll have to ride along where I am. Maybe something will break my way.

Age 65 – I can’t invest now: we have no money. My pension doesn’t go far. The only asset we have is the house, and I can’t sell the house I’ve lived in for 30 years! And why would I want to borrow against it? It’d just kill us to see debt on our own house again: it’d be like I’ve wasted the 25 years I spent paying if off. Sure I wish I had started saving twenty years ago, but it’s too late now. You can’t invest when there is no income.

[FrankGrimes]

Age 18 – 25 I can’t invest now. I’m just getting my start in life. I don’t make a lot yet, and I’m entitled to have fun while I am young. I don’t want to look back and feel like I wasted my youth, you know? My friends are planning an overseas trip and I’m going to get myself a new car. There is plenty of time. Wait until I start making a little more. Then I’ll invest.



Pretty sure it came from one of Jan's books? This is the biggest cop out though, 18-25 is the best time to start. There is no reason you can't enjoy yourself while doing it, especially if you're living at home for cheap?

[MichaelW]

Interesting...

I used to pay myself first by putting all my salary into my mortgage offset account and limiting my expenses on my credit card to $2K a month or thereabouts. The difference effectively was my investment dollars off the mortgage which worked quite well for quite some time.

Now, I have a $310K LOC which I've put as 50% down and margined it into managed funds. I have a $125K LOC which is half spent as 10% deposit on the new IP. The balance of that LOC plus a new $550K loan is on its way shortly.

The problem now is that most of my monthly salary seems to go in servicing loans. It looks something like this:

PPOR: $1,200
LOC Managed Funds: $1,800 (I capitalise interest on the margin loan)
New mortgage: $3,900 (on $690K)
Total: $6,900pm

My total after tax salary is just a touch more than this so I'm broke before I get to pay the grocery bills. If I add the $2,000 Credit Card bill every month which covers our living expenses, plus the $1,000 cash we invariable spend a month in out of pocket expenses then I'm in the red big time. Its a good thing I'll have some rental income on the IP, some negative gearing deductions on it plus my managed fund income. If not I wouldn't be able to survive.

Not sure what that works out as a percent that I pay myself first? Its either 95% or 0% depending on which way you look at it. It certainly feels like 0% as its all just going in servicing debt... :(

Cheers,
Michael.

[bort]

that is interesting michael - depends on your viewpoint - 10% of what should you be saving? 10% of your gross / net salary income? 10% of all income including rent / dividends? 10% of net cash flow overall?

for me i'm in a similar position to Michael where it gets a little messy as to how much i'm actually saving for a number of reasons ... (although I could figure out the numbers using microsoft money if I could be bothered - given i only have 2 categories on there for personal spend - credit card or cash).

Basically I have my entire pay as well as any other income like dividends, rent income, tax refund etc credited to the non deductible side of the mortgage. Then sweep out the balance of my credit card at the end of the month, as well as redrawing a budgeted amount of cash per month.

To control my expenditure i just simply keep my credit card below a certain amount, say $1.2k, and limit my cash spending as well to a certain amount. Therefore i'm effectively budgeting my saving as my net pay less personal expenses on credit card and cash, and controlling this by not letting my credit card get above budget (within reason) or withdrawing additional cash above budget. (oh also deducting non deductible ppor interest given i count that as personal expenditure rightly or wrongly)

What I do with the net saving is not particularly relevant (well as long as its not private expenditure!), whether it be servicing monthly interest or other costs for negative gearing, or saving for a future capital investment, or offsetting non deductible debt etc etc - any of these purposes I would count as 'saving'. For me it is around 30% of gross pay i believe currently which i think is okay - i might improve it if i downsize my ppor, or gear some of that spare cashflow to reduce non deductible debt even further!

Provided I can get or calculate a picture of my net cash flow from both my personal and investing income and expenditure independently and also in total overall and i'm not too particularly negative, I am happy! ;)

cheers

Bort :D

[Bricks & Mortar]

Interesting...

I used to pay myself first by putting all my salary into my mortgage offset account and limiting my expenses on my credit card to $2K a month or thereabouts. The difference effectively was my investment dollars off the mortgage which worked quite well for quite some time.

Now, I have a $310K LOC which I've put as 50% down and margined it into managed funds. I have a $125K LOC which is half spent as 10% deposit on the new IP. The balance of that LOC plus a new $550K loan is on its way shortly.

The problem now is that most of my monthly salary seems to go in servicing loans. It looks something like this:

PPOR: $1,200
LOC Managed Funds: $1,800 (I capitalise interest on the margin loan)
New mortgage: $3,900 (on $690K)
Total: $6,900pm

My total after tax salary is just a touch more than this so I'm broke before I get to pay the grocery bills. If I add the $2,000 Credit Card bill every month which covers our living expenses, plus the $1,000 cash we invariable spend a month in out of pocket expenses then I'm in the red big time. Its a good thing I'll have some rental income on the IP, some negative gearing deductions on it plus my managed fund income. If not I wouldn't be able to survive.

Not sure what that works out as a percent that I pay myself first? Its either 95% or 0% depending on which way you look at it. It certainly feels like 0% as its all just going in servicing debt... :(

Cheers,
Michael.

Hi Mike,

Basically know how you feel,
Our portfolio started off with intense budgeting to the last cent, as we began with some vacant land. There was a shift with return on investment with the sale of some of the land, and suddenly we had some incoming rents with the purchase of an existing house and also from the building on one of the blocks....suddenly it no longer was a daily check to see how much funds were available before we had to sell some shares (emergency pot).

Intially there was not a spare cent.

We've bought more, since then and now we're geared using just about all my salary and living off the wifes wages. Rather than adopting some creature comforts were buying building products for renovations, currently our spare cash goes into creating more wealth in real estate. As we are currently renovating our daughters unit our own house and settling on another unit on 11/07 the priorities are to finish these first. Then we'll do some fine tuning with the budget later.

I believe there are priorities, and budgets although 'a very important item' aren't necessarily able to be adhered to in every instance. Your circumstances will change, and you need to change with it, When money gets tight, the budget is your best friend as it will keep you in check.

I believe Alexlee had it pegged.... Whether it's 10, 20 or more it doesn't really matter, It's making sure that you 'do it' that's important.

If the statement runs true that everyone's time has passed before they have taken the oportunity to invest. How many baby boomers are there out there who will be able to make an impact when they retire :confused:

[gcncbc]

One system you may want to try is from a book, called The Money Tree. A buyer would need to contact a book store and order it in. The auther is from Adelaide. By the way its great to get kids started on with pocket money as well.
Basically her system is 10% put permanently away and not touched or maybe paid to an investment , 20% put away for the saving of something special or additional bad debt pay off and live off the final 70%, no compromise. Book cost is @45
Cheers:)

[lizzie]

yep - wish i'd started in my early 20's instead of buying lunch every day, spending on clothes i didn't need and having a high-maintenance (now) ex.

we automatically put $500/mth in a managed share fund - and before you can blink it's up to $30k again. when did that happen? especially considering i pulled it all out only a few years back for another ip deposit.

if you don't have it, you don't miss it.

[alexlee]

Originally Posted by alexlee

Age 18 – 25 I can’t invest now. I’m just getting my start in life. I don’t make a lot yet, and I’m entitled to have fun while I am young. I don’t want to look back and feel like I wasted my youth, you know? My friends are planning an overseas trip and I’m going to get myself a new car. There is plenty of time. Wait until I start making a little more. Then I’ll invest.

Pretty sure it came from one of Jan's books? This is the biggest cop out though, 18-25 is the best time to start. There is no reason you can't enjoy yourself while doing it, especially if you're living at home for cheap?

Saving sure doesn't get any easier. On the other hand, saving early and getting even just one IP early on jump starts your plan. Of course you're entitled to have fun while you're young: you just have to take responsibility for that fun by working your a*s for the next 40 years after that!
Alex

[Andrew_A]

I originally learnt the power of an AIP (Automatic Investment Plan) during my first full time job at 19. Really a savings plan in this case.

My pay which was around the $250 a week mark always disapeared as it does. So upon my sisters advice I started a sub account off my main account which I swept $100 to every week, I had a rule never to touch the sub account. Living at home it wasn't very difficult to not miss the $100 a week even though it was a lot of my pay percentage wise. Before long I had enough for my first overseas trip and that was definitely worth the sacrifice. I wouldn't trade the ability to see the world for any amount of missed compounding later in life. How sad to become president of your country and to have never held a passport? (George W)

Not a sophisticated plan but it was important for me at the time, if only I had learnt something practical like this at my school (Brisbane Grammar) instead of all the guff they taught us at during our imprisonment.

[Ebbie]

The problem now is that most of my monthly salary seems to go in servicing loans.
I'm in a similar situation so I don't have 10% of my salary available to save. Unless paying the interest on investment loans is classed as 'paying yourself first'? Most of my pay goes toward servicing 'good debt' and I only spend what's left over.

I plan to allocate 10% of my salary directly into an offset account or managed fund but I will slowly build up to this figure as I receive pay rises or reduce expenses etc.

[saucy gibbon]

I believe the 10% rule only has application when you are attempting to acquire your first / next asset to leverage off. Otherwise it makes little difference.

Further, why is it 10% ? The amount should be dependant upon income ie someone earning $200k per annum should be able to put away a greater % than someone earning $20k.

[qaz]

I actually think to an extent the more you earn, the harder it is to put away a large % of it in savings as taxes eat up more and more of it.

I live at home so savings is alot easier for me. But I still manage to put away the best part of 50% of the net income.

[saucy gibbon]

Taxes only take a chunk of the extra over, if your costs are relatively fixed and your boss gives you a gross payrise of say $30k you should be able to save your original amount plus the extra net increase.

Of course as per the Richest man in babylon, you can always find more "expenses" to eat up the extra.

[landlubber]

Whilst I'm sure all the "save 10,20 etc %" posts in this thread are well intentioned, I offer a challenge. Write down the names of all the people you know who have "saved their way" to financial freedom. I'll bet it's a VERY short list.

The name of the game is "acquiring & holding growth assets" with a good dose of gearing involved. In our case, residential property. When do you acquire property? As soon as you can!

The same "10%" you are saving is MUCH, MUCH better put to use gearing an IP. If you can PROVE you have excess cash-flow and can save 10% and have a good employment record and a "clean rep." you CAN get finance on your first/next IP NOW.


LL

[alexlee]

Whilst I'm sure all the "save 10,20 etc %" posts in this thread are well intentioned, I offer a challenge. Write down the names of all the people you know who have "saved their way" to financial freedom. I'll bet it's a VERY short list.


LL, while very few people save their way to financial freedom, I'd argue that being able to save makes property investment 'safer'. There will always be hiccups like interest rate rises, repairs, vacancies, etc. It is the ability to save that provides a cusion for those times.

e.g. I would suggest a first time investor have at least a 10% deposit, if not 20%. Not because they can't borrow 105% LVR or that the interest on the extra 10% is so onerous, but because the act of saving proves they are more likely to survive hard times ahead. Especially in this current environment.

A cash cushion is especially important for those of us who have relatively higher loans. A 0.25% interest rate rise would mean an extra $x in repayments, and while eventually rents catch up, there might be a 12 month lag. Savings (assuming you're geared to neutral cashflow levels) assures that you won't have a problem.
Alex

[Rolf Latham]

Hi Alex

Never a truer word spoken..........I call it a little different........risk management, but I think we mean the same thing.

While its easy to get a high lend for an initial purchase, having some buffer behind you when the pooh hits the fan will buy you less worry. With worry being one of the most distructive an useless emotions, if you can minimise that one duting your investing career, that would help one a lot
ta
rolf

[alexlee]

I just wonder how often the following happens. New investor decides to buy IPs. Doesn't have savings but the bank is willing to lend 105% LVR. Investor buys, then the market stalls (such as now). -ve cashflow hurts, and the market is dead so the investor is turned off property, usually selling just before the market booms again. Worse, they can't make the repayments and have to sell at a loss.

On the other hand, someone who has a long term plan before they buy, as well as a savings habit, will buy at a lower LVR (so better cashflow), and with the long term plan will continually save and buy more IPs as the market stagnates or drops. Then, as the market turns back up they have multiple IPs catching the wave.

Very few bankruptcies are caused just by negative equity (i.e. few people go bankrupt from the bank calling in a loan unexpectedly). Most (including businesses, etc) are because of an inability to service loan payments. That's why an investor can go bust, but their properties can be perfectly good IPs if the right financing is in place (the theory that there are no good or bad IPs, just the price you pay and how you finance it).

If you're just starting out, and you hit a slow market, your equity is probably pretty minimal. That's when the cashflow (savings, in most cases) becomes key.
Alex

[landlubber]

Alex,
If a person can satisfy a lender they have the "where withall" plus have 10% of their income as spare cash flow...they can overcome every problem you discuss. ( In 20 years in IPs and millions in loans we have NEVER had 10% spare income...if we did , we'd buy another one !!)

Although ....since you discuss "equity" and "market stalls" ( whatever that means ... auction clearance rates ?, building starts?, finance approval levels ? time for sale? ) and "cashflow" all in the same breath ...I'm not sure quite what your point is.

Equity ?...I have NEVER known a lender to call a loan on residential as long as the payments are current.

Cashflow ?...that's the key ...and if you have 10% of income "spare" you're covered.

Disasters ?...( the stove ?, the HWS? ) ...put 'em on a credit card....if & when they do happen which is NOT often.

The most important thing is to START the IP journey and learn the ropes.
If things really get tough, it's AMAZING what you can do without.

Alex ...be brave !! Buy something !! You're in one of THE great residential markets on the planet (the UK) because they have virtually used all the available building land already and new construction is very difficult to get approved. Demand exceeds supply ...beautiful !!!

LL

[alexlee]

The most important thing is to START the IP journey and learn the ropes.
If things really get tough, it's AMAZING what you can do without.

Alex ...be brave !! Buy something !! You're in one of THE great residential markets on the planet (the UK) because they have virtually used all the available building land already and new construction is very difficult to get approved. Demand exceeds supply ...beautiful !!!

LL

LL, I do have a few IPs. I started buying in 2000 and have averaged one IP a year. Nothing fancy, but I know the basics. I'm not buying for the time being but I certainly plan to buy more (much more, I hope) in the years ahead. And I agree with you, the most important thing is to start: playing it so safe you never buy anything means you never make anything.

Yes, IF one puts IPs as the first priority (which I do), one can always find a way to find the money to hold the IPs. However, my comments are mainly directed at those who buy without a plan. They buy and just expect the market to go up smoothly. If it doesn't (as is the case with the the current flat market in the Eastern States) or something happens (repairs, vacancies, damage, etc), they just end up selling and giving up. Without a plan or savings, newbie investors might wonder why they should give up their lifestyle to fund something that they don't believe in. THAT's the biggest loss, in my opinion.

With a savings habit and long term plan for property investment, it's more likely the investor will end up buying multiple IPs and make much more from property. IMHO, buying is only the first step, it's the HOLDING that makes you money in the long run. I'm a buy and holder, and a market crash will only cause me to buy more. However, I would argue most newbies don't have the belief in property that we do.
Alex

[landlubber]

Alex,
Sounds like you're on your way and you've got a plan! That's fantastic.
Hold onto 'em cause rents are about to go ZOOM. More cash flow ...more IPs.

The other guys ? the ones who can't discipline their finances ? mate , nobody can save them except themselves. And we gotta be be glad , us property investors always need tenants !!

Enjoy July in London. I hope you get a few days of summer !!!! :- ))))))

LL

[redwing]

I'm interested how people 'Pay themselves first'.

For many years I have struggled with accounting for every purchase in my life, and come back to the basic understanding that the age old truth of 'paying yourself first' is really all that you need to do in terms of budgeting.

How do you lock 10% (more?) of your cash turnover away for the longer term?

I imagine for many property investors it would be saving for their next deposit.


Many years ago I used to put 10% of my fortnightly wage into a seperate account and every time it reached $1,000+ I'd purchase some shares (from memory GIO when it floated, Fosters, BHP etc) sometimes the same share but at a different price some Months later (dollar cost averaging).

These Shares formed a deposit a year or more later for a duplex block of land that I bought from DOLA and sold to Homeswest within a few months and made about $15k profit

It all snowballed from there, my 10% is now no longer going into a seperate account though..

Redwing

[alexlee]

Alex,
Sounds like you're on your way and you've got a plan! That's fantastic.
Hold onto 'em cause rents are about to go ZOOM. More cash flow ...more IPs.

The other guys ? the ones who can't discipline their finances ? mate , nobody can save them except themselves. And we gotta be be glad , us property investors always need tenants !!

Enjoy July in London. I hope you get a few days of summer !!!! :- ))))))

LL

Touche, though with no air con in the tube or most homes, and no beaches nearby, a hot summer in London isn't that much fun anyway.

Saving and investing aren't mutually exclusive. I would say savings helps investing, in terms of providing deposits, cash cushion for vacancies, repairs, peace of mind, etc.

I don't mind the financially inept renting from me. However, for those people who come onto this forum looking for ideas, I think we should try to point them in the right direction. I personally never advise people to 'just buy' because I know it's not that simple, especially in the current eastern states market.
Alex

[landlubber]

Youre right , the UK is NOT "set up" for hot weather. But the tube is still a fantastic transportation system...air or no air !

It's just that investing with gearing is SO much more effective at creating wealth than saving.

If you follow Jan Somer's guide for selecting IPs as outlined in here book ...I don't know how investing could get much simpler. I've been ripped off by property scams , and 10 years later ...that IP is one of our good performers and never been vacant.
We paid what we thought was 30% over the "market" when we bought our PPOR in 1986 and we're in debt to our eyeballs. It's now worth nearly 8 times what we paid for it. Nobody I know can save like that...I sure can't !!

Ahhh....have a pint o' lager for me ..... It's G & T time !
LL

[geoffw]

Youre right , the UK is NOT "set up" for hot weather. But the tube is still a fantastic transportation system...air or no air !Only if you're not in one of the outer stations. You could get to Southampton faster than you could get to one of the furter tube stations.

At least Sydney had express trains, not stopping at every station along the way.

But yes, I've never done especially well on "saving". I've had a few periods of enforced belt tightening, but without property, I'd be one of the unintelligent renters. I was for very many years.

[luckstah]

I like to take out about 15% of my pay each week and put it into an ING account. From there I use the cash to purchase shares etc. Fairly simple strategy but it works well for my current situation.

That being said, reading the richest man in babylon changed my whole perception on wealth creation. Fantastic book, it should be mandatory in all schools around this country I think.