The Richest Man in Bablylon?

[TEG]

Hi Guys,

I´m sure most people on this site have read ´The Richest Man in Babylon' by George S. Clason.

One of the principles in this book is to pay yourself first a minimum of 10%.

I used this principle while saving for my first deposit for my first property, and it worked very well.

Now I have 1 x PPOR, and 1 x IP. Both with very high LVR.

I want to keep invest in property for the long-term.

Do you think it better to put all spare cash into the PPOR debt, and pay it off ASAP (i.e much sooner than the 30 yr term), and once enough equity is built up, to refinance the PPOR to buy IP # 2?

or..

Is it still a good idea to follow the advice in The Richest Man in Babylon, and put away min 10% of income into , say, a high-interest online savings account. Once there are sufficient funds in this account, it would be used for investing purposes (either managed funds, shares, or deposit for IP # 2?)

I know it would be more profitable to just put all money into paying off PPOR debt first (since PPOR debt is non tax deductible), but is there a psychological reason for putting 10% into a savings account, regardless of having large PPOR debt (i.e you can see that you can save money and this money is steadily growing, and that you can invest this money, rather than just pay off debt..

Any thoughts ???

Thanks

 

[jaycee]

Not a direct answer, but a 'compromise maybe..

You do have the option of setting up an offset account against your PPOR. Any money you put into that will be deducted from your mortgage balance before interest is charged... jus tlike paying into the mortgeage... EXCEPT...

You can withdraw it at any time etc, and put it / some of it into an investment etc.

Also, if you do decide to rent out your current PPOR.. You can use the $ in the offset say to buy your new one with less/no debt.. and have the now investment porerty with debt against it.. Rather than what would work out to the other way round (if you moved out having paid your current place down significantly or totally and then had to borrow a lot for your next PPOR)

 

[alexlee]

10% is very, very low. 30-40% is more like it.

 

[TEG]

Hi Jaycee,

Both my properties are with the same lender.

I already have an offset account attached to the IP. No offset for the PPOR.
Currently all my spare cash is sitting in the offset.

I know it should be the other way around, but originally both properties were supposed to be IPś as I was still living with parents. Now i have moved out of home and into IP # 2 (now my PPOR).

Is it possible to get the bank to associate the offset with the PPOR, rather than the IP ?

Thanks.

 

[Peter Parker]

I know it would be more profitable to just put all money into paying off PPOR debt first (since PPOR debt is non tax deductible), but is there a psychological reason for putting 10% into a savings account, regardless of having large PPOR debt (i.e you can see that you can save money and this money is steadily growing, and that you can invest this money, rather than just pay off debt..

TEG, you could argue the same about paying off the PPOR.

If you put extra money in it comes straight off the amount owing, thus increasing your equity.

Not only that but even one-off payments to the PPOR mortgage mean that a greater portion of subsequent payments come off the principle (and thus boost your equity) rather than form 'dead money' interest to the bank.

Regular payments as you were thinking would make this happen even faster and mean that your equity increases exponentially (even if your payments don't).

An online savings account might get you 5 or 6% interest. After income tax it will be no higher than 4% pa. Then there's inflation of maybe 2 or 3%. So the returns are very low.

Whereas paying off the PPOR results in a much higher risk-free return and spiralling equity (which, like cash, provides the base to buy more IPs). The difference is you'd have more of it (and faster) than saving cash because you're keeping the returns rather than them being eaten up by tax and inflation.

Banking sounds like a great business - pay punters 2 - 6% on their deposits and charge much the same people 8% on their home mortgage and double that on credit cards etc!

Acting on psychology rather than fact can sometimes be expensive and/or slow weath accumulation.

 

[TEG]

Thanks Spiderman.

Your answer makes perfect sense to me.

 

[Ausprop]

for those that haven't read the book I'll save you some pain...

think of some blokes donkey years ago in robes. ones lives a flash life, the other saves a bit. Moral: spend less than you earn, 10% according to the book.

now you can deposit $10 to my bank account.

 

[Dazz]

for those that haven't read the book I'll save you some pain...

Too late chief.

I heard some great things about this little pocket book about 10 years ago. Went down to the library and was determined to unlock all of these great mystical truths....got 3 chapters in and was absolutely bored stupid. Put it down for 8 years.

Two years ago I was kindly presented a copy for giving a speech at a property talk. On stage I thought - wow - this little mongrel of a thing.

I became super determined to get through it - all of about 120 pages. Only managed about 5 chapters before going off into Noddy land again. It's got the pulling power of an East Mongolian tree frog on No-Doze.

Dead set - if that isn't the most turgid little piece of financial twaddle ever written, it'd be damn close to it.

Perhaps the attention span is a little thin nowadays, but I reckon the author cooda got his message across on one page. Spend less than you earn and wisely invest the rest. Next.

 

[Graemsay]

I found a link to a PDF version of the book here:

http://www.ccsales.com/the_richest_man_in_babylon.pdf

 

[redwing]

Too late chief.

I heard some great things about this little pocket book about 10 years ago. Went down to the library and was determined to unlock all of these great mystical truths....got 3 chapters in and was absolutely bored stupid. Put it down for 8 years.

Two years ago I was kindly presented a copy for giving a speech at a property talk. On stage I thought - wow - this little mongrel of a thing.

I became super determined to get through it - all of about 120 pages. Only managed about 5 chapters before going off into Noddy land again. It's got the pulling power of an East Mongolian tree frog on No-Doze.

Dead set - if that isn't the most turgid little piece of financial twaddle ever written, it'd be damn close to it.

Perhaps the attention span is a little thin nowadays, but I reckon the author cooda got his message across on one page. Spend less than you earn and wisely invest the rest. Next.

Eat Less, Eat Better and Exercise More - Now your Rich and Thin. Next.

 

[Kaz111]

Eat Less, Eat Better and Exercise More - Now your Rich and Thin. Next.

Great.. So I am reading the book at the moment and haven't yet got to the part where it says to save 1 of my 10 morning tea chocchie biscuits for later (to be thin)

 

[Ausprop]

Went down to the library and was determined to unlock all of these great mystical truths....got 3 chapters in and was absolutely bored stupid. Put it down for 8 years.

Two years ago I was kindly presented a copy for giving a speech at a property talk.

so can you return the library copy now? others are waiting to have a go

 

[ianvestor]

so can you return the library copy now? others are waiting to have a go

On that note Ausprop, Lifeline is having it's annual bookfest in Brisbane soon (Jan 29) and there's usually heaps of cheap copies of the classics. (But you'll have to spend time digging for them).

Two years ago, a friend and I found around 10 copies of Babylon for between $0.50 and $3.50.

I find the book entertaining, and read it every year.

 

[BayView]

10% is very, very low. 30-40% is more like it.

Try telling that to someone earning $50k or less. Even $60k

Methinks that most people here - who I'd guess are in some form of IT job are in lalaland in terms of what they think yer average penguin earns.

Good luck to you all, but please stay in the real world.

 

[kathryn d]

Try telling that to someone earning $50k or less. Even $60k

Methinks that most people here - who I'd guess are in some form of IT job are in lalaland in terms of what they think yer average penguin earns.

Good luck to you all, but please stay in the real world.

I'm willing to offer tips of thriftiness

 

[jaycee]

Try telling that to someone earning $50k or less. Even $60k

Methinks that most people here - who I'd guess are in some form of IT job are in lalaland in terms of what they think yer average penguin earns.

Good luck to you all, but please stay in the real world.

I think Alex was quoting figures.. suggesting that 10% isn't enough to give you what you probalby think it will etc To meet those expectations people may have, it might realistically take saving & investing 30-40%...

He didn't say it was easy or hard, but perhaps challenging the 10% is enough notion.

La la land or not, didn't seem to have anything to do with it

 

[BayView]

I think Alex was quoting figures.. suggesting that 10% isn't enough to give you what you probalby think it will etc To meet those expectations people may have, it might realistically take saving & investing 30-40%...

He didn't say it was easy or hard, but perhaps challenging the 10% is enough notion.

La la land or not, didn't seem to have anything to do with it

Which just supports my argument.

Whilst I agree with the statement in pure financial and wealth building terms (we already cough up about this amount of our income for wealth building), to put it out there that the figure should be more than 10% is not realistic for the majority of the planet.

Hence, the statement is most likely coming from one who is in the very small minority of the planet who probably whack in a hefty 30% or so.

Nothing wrong with being in the 5% - good luck to all of us who are. But ya can't tell the 95% penguins to do it, because they simply can't and still live a decent life on a day to day basis.

Here's an activity to undertake on a rainy saturday afternoon; go to any Mall in Aus at around 12.00pm - especially near the food court, and survey 200 people and ask if they would be willing to save 30% of their income for wealth building.

 

[skater]

Bayview, I agree. This forum - great as it is - has a fair few people earning really big $$. You just have to look at Sash's thread on how much +/- income people have in their portfolio's. There are actually some that are neg geared to the tune of $40k or more. The average person just has not got that capacity to either save or lose that amount each year.

We have never been big income earners. In the early years it was a huge, huge struggle. Two steps forward, one step back. In order to build a portfolio we had no choice other to look for high yeilding properties. Whenever a challenge arose (which they did all too frequently) we had to cut all discretionary spending and fly by the seat of our pants just hoping that we would come through the other side. Those on high incomes or have been brought up in a wealthier household (BTW, an average income would be wealthier) will never know the struggle, so they can probably never understand fully what it is like.

Even now, Hubby earns a lot more than those early years, we are still not huge income earners. Saving 10% is now do-able (30-40% impossible), but only because there is now only one person skating in the household. We still have outstanding equity used for skating purposes and for buffer that have not been repaid. We have been called tight ar$se's by both the kids on too many occasions to mention, yet we were able to build a portfolio AND give them the skating lessons they desired (which were certainly NOT cheap). Something that many on much higher incomes would say can't be done.

 

[Dazz]

Bayview, I agree. This forum - great as it is - has a fair few people earning really big $$. You just have to look at Sash's thread on how much +/- income people have in their portfolio's. There are actually some that are neg geared to the tune of $40k or more. The average person just has not got that capacity to either save or lose that amount each year.

I agree with you both....but then having a larger income doesn't help all that much, as the strategy of purchasing and holding negative cash flow properties eventually crushes even the high flyers if you keep going with it.


Noel Whittaker reckons this type of "enforced savings" is the absolute bedrock of financial success however, and he certainly has his act together, so maybe it's true.


The straw that broke our back was when we purchased our last residential property in 2004....we thought we were doing good. Nice riverfront block, great land component, small 3x1 1950's box, surrounded by mega million $ mansions. Bought it for a heavy discount cos it had a height caveat on the title which meant we couldn't, and no-one after us can, build a mega mansion on the land.


Rent for that house was 20K pa, expenses were 85K pa, hold cost was 65K pa before tax, and about 40K pa after tax. It's a brave strategy to have $ 800 per week every week flying out of yer pocket and crossing your fingers hoping that it'll go up. We've been banging our head against that wall for 7 years now. In that time, the rent has gone up to 26K pa.


Enforced savings or utter stupidity ?? Take your pick, depends when / if the equity fairy comes or not.


Every cloud has a silver lining though. This one house literally forced us onto a different investing path altogether, which, after much daunting and stressing, has turned out to be a winner.


As for your 200 people in a food court within a mall, I dare not Marc. They'd be more likely to punch you than answer you with a civil tongue.....well, maybe that's just the folks that frequent our mall.

 

[skater]

I agree with you both....but then having a larger income doesn't help all that much, as the strategy of purchasing and holding negative cash flow properties eventually crushes even the high flyers if you keep going with it.

Ah, yes. It is the accepted way that you buy for CG only, isn't it? You saw the light and got into your big sheds. Good for you! We couldn't, even if we wanted to with that one, but found our feet with the high yeilders.

Some of the higher income earners go CG all the way and have a huge deficit and some others choose to pay huge amounts down on each purchase and keep the LVR at really low levels to ensure they don't have the huge deficit. No matter which way you look at it though, those on the higher incomes, should they choose to live a budget lifestyle will always outdo those on the lower incomes.

I look around and I see many people my age who have had a reasonable income all their life and ask just how much further along in our investing career we would have been if we had always had the income we have now. At the end of the day, it doesn't matter though, because I know that we will be much better off than the average man on the street due solely to the choices we made many years ago.