Increase Cashflow (Vary Tax vs Capitalise Interest)

[TheBacon]

Hello all,
Having recently placed the missus and myself on a budget (awful, but important things), it seems pretty clear that along with paying down some personal debt I need to improve the week-to-week cashflow.

The two ideas I have been toying with are:

• Vary my income tax to take into account my negatively geared investment property. Currently I am negative about $20k/yr. A $20k reduction in my taxable income equates to approx $8k reduction in tax. That would free up $667/month for the family budget. That would take us from very tight to just a little tight.
• Capitalise interest and costs. The annual shortfall in my IP is $20k – thus I would capitalise this amount – freeing up a whopping $20k (minus the interest on this of around $1,600/yr) each year. I would use about $1k/month to pay down personal debt and put the rest into the family bills/budget.
• Of course there is the ultra-aggressive option of doing both!

My current thoughts are that the first option is the most logical, and financially conservative. It would probably pay to give that a try before taking on a more aggressive option (#2). The large refund at the end of the financial year is always nice (we don’t save well, so its forced savings of a sort), however the week to week benefit may outweigh the end-of-year bonus.

I think I would like to leave option 2 as a fallback safety net to be used only if needed in emergency.

I am interested in other ways of increasing my cash-flow also. For instance using ‘spare’ equity to purchase listed property funds has been touted, however this seems risky considering equity would cost me about 8.5% and there are not may funds that deliver more than 10%. If I were to invest say $200,000 I would only be up $3,000 over the course of the year. I cant see it any better upping the amount by getting a margin loan as they seem to be around the 10% interest mark so I would need a VERY high return to offset the cost….

What are your thoughts on my strategy?

Any other options for increasing cashflow?

Cheers

TB

 

[LynnH]

TB

Have you thought about doing option 2 (capitalising interest and costs) and then, when you get your tax refund, depositing it into the LOC you are using to capitalise interest/costs? This way, you get to free up that $1000 pm to put towards reducing personal debt (plus extra to go into your budget), but you still have the 'enforced saving' element which will help reduce your LOC. This also has the effect of converting non-deductible debt into tax-deductible debt.

Obviously, you would have to do the figures on this option ... and run it by your accountant before you go down that path!

Of course, the 'enforced savings' (tax refund) could also be used to reduce personal debt or to put towards managed funds (or whatever) which would give you extra income to help the budget along a little.

Cheers
LynnH

 

[Belu]

when you say personal debt, is this your own home or consumer spending?

Why not do #1 and then put all of those savings straight into consumer debt? your cashflow benefit will be the gradual reduction in non-deductable interest

 

[flowkingrich]

If you are disciplined enough to manage your budget diligently then check out this link

http://www.ato.gov.au/content/downloads/n2036-03-2007.pdf

Instead of forced savings collect your losses now. "A bird in the hand is worth two in the bush"

Regards

 

[The Y-man]

I am interested in other ways of increasing my cash-flow also....

Pay rise, overtime, second, third job......

Cheers,

The Y-man

 

[TheBacon]

when you say personal debt, is this your own home or consumer spending?

Both really. All my my consumer debt is rolled into an LOC taken against PPOR. We still have a moderate mortgage also.

TB

 

[thedon]

Me and wife just switched to LOC to fund shortfall on our investments - we just had baby so her income is gone

Have heaps of equity so this will work well, only needs to get about 2% growth on the assets to be miles ahead as opposed to selling.

 

[Belu]

Both really. All my my consumer debt is rolled into an LOC taken against PPOR. We still have a moderate mortgage also.

TB

I would definitely suggest getting a tax variance and then using this difference to pay down personal debt.

 

[twobobsworth]

I still can't understand those who don't do the ITV. It's like investing in a company and getting 0% return.

 

[BayView]

My current thoughts are that the first option is the most logical, and financially conservative. It would probably pay to give that a try before taking on a more aggressive option (#2). The large refund at the end of the financial year is always nice (we don’t save well, so its forced savings of a sort), however the week to week benefit may outweigh the end-of-year bonus.
TB

This strategy is usually no benefit to people if their spending habits are out of whack, as it gives you more money that is too tempting to simply spend on "stuff".

You can argue that to get your refund at the end of the year is giving the Govt a free loan for 12 months, but if you don't have that money, you can't blow it.

By your own admission you are not good savers, so how would this new increased income change anything?

Adding to that the strategy of "capitalising interest' I think is a dangerous cocktail for the undisciplined.

I think you are better off for the time being to get your refund at the end of the year and use it for debt reduction on the comsumer debt and PPoR loan, keep paying you minimum monthly interest on the IP's and work VERY hard on your:

"LATTE FACTOR" :
http://www.finishrich.com/free_resources/fr_lattefactor.php

Do that for a full 12 months, develop a strong money management ethic, then go for the ITV and you will benefit from it.

 

[TheBacon]

By your own admission you are not good savers, so how would this new increased income change anything?

Fair point. We arent great savers, but we are OK (a small portion automatically goes to an ING account - from which I plan to buy some shares, and repeat). The budget works and we are sticking to it (so far) - however its pretty tight and the normal monthly fluctuations (i.e. one month electricity is high, next month gas is low, next month the car costs a lot more to service than budgeted for) mean we often have to cut out any debt reduction and just pay interest.

The extra money is not for more ‘spending’, but for more flexibility with the bills.

Adding to that the strategy of "capitalising interest' I think is a dangerous cocktail for the undisciplined.

Yeah – I think I’m with you here. Might revisit at end of financial year. If I am confident of our resolve I’ll go down this road – otherwise give it a miss.

"LATTE FACTOR" :

Who has money for latte when you’ve gotta buy bait and beer to go fishing with…?

Seriously though I’m pretty tight on myself. Have constrained my ‘pocket money’ to an amount that is much less than most teenagers get from their parents.

I take on board though that a conservative approach and self discipline are required.

Cheers

TB

 

[monster24]

I think you have to get a bit more creative to increase your cashflow. We have done it....

1.we have taken up a japanese student that lives with us for the moment = +$800/month
2. my wife has started her own teaching business part-time = +$1500/a month
3. I selling stuff on eBay/internet = +$150/month
4. got a payrise for the new year = +$400/month


etc...then we put ALWAYS 30% of this additional money into an "immortal saver account" where number 1 rule applies: DON'T TOUCH ! and this is really for some further investment, deposits, funds etc. It works quite well and the funny thing is that the more we put additional money beside the more cheques are coming in....
All the best
Thomas

 

[slingshot]

Hey Monster24,

I'm on the the GC also and as a matter of interest, how did you source your Japanese student. I have a few rooms available and am thinking of doing the same, two rooms will pretty much pay my ppor mortgage.

Thanks
Slingshot

 

[casper007]

Have you looked at refinancing all of your personal debt into one loan?

Cut up your credit cards.

Get the tax variation (at present it is an interest free loan YOU are giving to the tax department) and put it directly into paying off your personal debt.

Set yourself rewards for sticking to your budget ... weekly and monthly (don't need to be spending rewards ... just a way of patting yourselves on the back for sticking to your plan).

The Japanese student idea is also great ... especially if you can get them to cook cheap Japanese meals ... or just cut up all that fish you catch ... eat it raw and save on gas bills...

Good luck ... sounds like you have made the first step ... just keep putting one foot in front of the other.

 

[BayView]

Set yourself rewards for sticking to your budget ... weekly and monthly (don't need to be spending rewards ... just a way of patting yourselves on the back for sticking to your plan).

The best reward I reckon for sticking to your budgets is to see the Bank Statement every month.

 

[BayView]

The Japanese student idea is also great ... especially if you can get them to cook cheap Japanese meals ... or just cut up all that fish you catch ... eat it raw and save on gas bills...

Do they wear tartan skirts and long white socks?


just kidding.

 

[Witzl]

i would have to agree that having a boarder/"housemate" is the BEST way to increase your monthly cashflow.
Whilst myself and my partner dont have a PPOR (We rent), we are still trying to maximise our cashflow to get ahead whilst the time is right - so we rent a larger house than is necessary and have extra people live with us!!

The idea of a japanese student is excellent though, as they would be much quieter and keep to themselves more than a local student or boarder. I might look into that when we move up to our next rental house in a couple of months!!

FYI - we currently have 2 people live with us, which adds +$1200 to our cashflow! We basically rent for $150/wk for the pair of us!