Contents
- Contents; Introduction
- How to start; Budgeting; Credit Cards
- Where to start with debt reduction
- How much to save
- Dealing with temptation
- Summary; Suggested Reading
Introduction - Why Save
When first starting out in investing, most people will not have an existing asset base to leverage against. The first step to acquiring an investment – particularly investments such as real estate – is to find enough money for a deposit. If you own existing property, for example, your principal place of residence (PPOR), you could refinance part of the loan to draw out equity you might have available – and use that as the basis for your deposit. Naturally, there is an increased risk in doing this, since you are increasing the amount of leverage you are using by effectively borrowing the deposit as well. Assuming you either don’t have such an asset base, or else you don’t wish to use that method for acquiring additional real estate, you have few choices but to use the tried-and-true method of saving for a deposit.
I have heard many people complain that they find it difficult to save their money, and certainly many people find saving a slow, boring, and very unexciting chore. Indeed, I would agree with them – saving can be all of these. However, I usually challenge these people to consider saving as merely a means to an end, a launch pad into the exciting and challenging world of investing – and as such, it becomes a more interesting and valuable task.
There are two main reasons to save:
- The first reason is what I have previously described – saving money for a deposit on an investment such as real estate.
- The second reason is not so much saving, as it is making cash flow available to service investment debts.
Leverage (borrowing money) is one of the key elements in making it possible to invest in expensive assets such as real estate, but you do need to be able to service the debt and expenses – pay the interest costs, and perhaps loan principal repayments, plus the expenses incurred in owning real estate or other investments. This is especially true if the income received from rents or dividends won’t be enough to cover those loan payments and expenses.
Cash flow
Cash flow is an extremely important concept in any business, and is equally important in the business of owning investment properties. Cash flow positive investments are great in that they don’t require you to service them from your own pocket. Unfortunately, a significant percentage (possibly even a majority) of the real estate available in Australia would not fall into this category, and will require some form of additional cash flow to maintain and service the expenses and debt.
The concept of cash flow in investing terms is simple – an income stream – money that comes in to your pocket regularly, and that you can hopefully count on for the future. For example, your pay-packet from your job is cash flow. Income from rents or share dividends or managed fund distributions is cash flow. Pocket money is cash flow. The general idea is to ensure that the cash flow from all of your income sources is greater than all of your expenses. Otherwise you eventually go broke (unless you can do some clever, but risky things like converting equity into cash flow – but that’s another complex topic we’ll have to put aside for now).
You can utilise this cash flow for a number of purposes – living expenses, servicing debt, or simply accumulating it to purchase investments (shares, or a deposit for a house for example).
So, once you understand that saving is a useful exercise, the next question many people may ask is – how do I actually save my money? Many people effectively live payday-to-payday, using all of their income just to live. Worse still, many people choose (or are forced) to live on credit – creating large credit card bills that soak up cash flow just in maintaining the debt, let alone repaying it.
