I seem to be speaking to more and more investors lately who are looking to cash up. The opinion of some is that property values are topping out and a correction may be on the horizon. If their expectation plays out, with reserves of liquid capital, they’ll be ready to cash in on deals if the market pulls back.
Regardless of your opinion of the future of real estate prices in Australia, saving money is crucial to any investment strategy. Even if you think property values will continue to rise, you’ll need money for deposits if you plan to continue acquiring properties.
At the end of the day, it doesn’t matter how much you earn. What’s important is how much you keep. Even if you boost your income, if you simultaneously increase your standard of living, you’ll eat up all of your extra cash and have nothing left to save.
Every investor must have a solid system for reigning in spending and saving cash. The smartest investors will monitor not only their spending, but also their current assets, in order to be certain those assets continue to be a wise store of wealth.
Here are 10 ideas for setting aside a larger chunk of your hard earned cash, no matter your investing outlook and objectives:
1. Sell Your Lazy Assets
Australians have a massive amount of wealth tied up in real estate. According to a recent Financial Review article,
the wealthiest 25 percent of Australians have about half of their net worth currently in property, while investors between the 50th and 75th percentiles have about a quarter of their wealth invested in real estate.
Because we recently experienced significant capital growth in Australia, most of these assets are not performing as well as they were five, 10 or 15 years ago.
Here’s an example. If you bought a property a decade ago for $300,000 and your rent was initially $350 per week, your yield was about six percent. That’s not too shabby. If that same property is worth $600,000 today and only returns $400 per week, your property is now yielding about 3.5 percent. The value of your asset grew, but its ability to return income didn’t. It got fat and lazy.
One option is to sell in order to put that equity to hard work somewhere else. If you’re bearish on the overall property market in your area, it might make sense to realise that gain, bank your capital, and then save it for a more profitable deal somewhere down the road.
Most investors are programmed to have a psychological aversion to selling real estate. They will struggle deeply with this option, but most investors also lack the skill to read the market and to properly assess their options, which is something we focus on heavily in our Property Apprenticeship mentoring program.
2. Sell The Stuff You Really Don’t Need
Our society loves to spend money. For the last few decades, the entire western world has been on a debt-fueled spending spree. Credit has been cheap and we are constantly being bombarded with advertising aimed and provoking in us feelings of discontentment.
As a result, we tend to use “stuff” as the salve for our negative emotions. When we feel down, we tend to spend money in order to make ourselves feel better. If we go all the way back to 1986, The Chicago Tribune referenced this tendency in an article on Christmas Eve: “We’ve become a nation measuring out our lives in shopping bags and nursing our psychic ills through retail therapy.”
That was the first mention of “retail therapy” in pop culture, but not much has changed in 30 years.
As a result of this cultural tendency, you likely have a lot of items you don’t really need. If you were to identify the four or five most important things in your life, you would find the vast majority of what you own wouldn’t make that list.
You may well be holding depreciating assets that are preventing you from growing your wealth through property investing. Here’s a short list of several things that may be taking up space and cluttering your life:
- Holiday Homes: Come on, we all know there are less expensive ways to holiday.
- Boats: Considering we only use them a few times a year, maybe it would be best to hire a boat, if you must.
- Caravans: Is this a luxury or a necessity?
- Motorbikes: They are fun, but not a viable option, unless you can afford to pay cash.
- Musical Instruments: Do you have any pianos, guitars or flutes around your house just collecting dust?
- Old Bikes: When was the last time you went for a ride on that $2,000 mountain bike?
- Power Tools: I’m sure they make you feel manly, but how often do you really use them?
I’ve only scratched the surface. Make a list of everything you own that hasn’t depreciated to the point of being worthless. If you don’t need absolutely need it, consider snapping some pictures and posting them on eBay or GumTree.
3. Implement The 30-day Rule In Your Home
Before purchasing big ticket items, agree with your partner to do the following:
- When you see something you feel you must have, force yourself to leave the store or the website immediately.
- Pull up a note taking app on your phone, and mark down:
- Details on Item
- Price of Item
- Store Where Located
- Date You Found It
- Create a reminder in your calendar app to look at the note again in 30 days.
- When the reminder comes up, if you still feel you desperately need it, go back and purchase that item.
The truth is, most of our purchases are bought on impulse. Delaying gratification is a discipline we must learn. The 30-day rule is a system that can help us develop this discipline. Be sure to find an accountability buddy, because this is a tough discipline for most people.
4. Buy Only Used Cars
The depreciation hit that you take when you buy a brand new car is ridiculous. The moment you drive it off the lot, it immediately loses approximately 10 percent of its value. But it doesn’t stop there. The average car will lose:
- 19 percent within 12 months
- 30 percent within two years
- 15 to 20 percent over the next few years
- 40 percent at the five-year mark
Once it reaches the five-year mark the rate of loss slows down. If you must drive a recent model, buy a car that’s two years old. If you’re a little less particular, a car that’s five years old seems to hit the sweet spot.
Of course, if you’re income is so high that you can live like a king and still save money, buy new.
5. Slash Your Dining Out And Entertainment Budget
I take my wife out on dates regularly, and we have six kids. I know as well as anyone that the entertainment category can be a major drain on anyone’s budget. Here are a few simple ideas that could save you some serious cash:
- Have Drinks At Home With Friends. Rather than going to a pub, because pub beers are expensive.
- Plan Ahead And Take Your Lunch To Work. Those $10 lunch “deals” add up fast.
- Rent Movies At Home. Instead of going to the theatre, plan a movie night.
- Buy Only One $4 Worth Of Coffee Per Week. Make it a routine make your coffee or tea at home.
- Find Inexpensive Ways To Entertain The Kids. Talk a walk, play sports, have a scavenger hunt, go to the local park – use your imagination, and ask your kids for suggestions, too.
- Take The Family Camping For A Holiday. Campgrounds tailored towards families are affordable, convenient and fun.
I could hear you whining as I was writing this. Just remember that saving money involves sacrifice. Sacrifice is painful, but in the long run, you’ll thank yourself for being able to save some money.
6. Negotiate Lower Rates On Insurance And Interest Rates
My friend Matt Macreadie over at Budget Brilliance.com recently inspired me with some of his practical tips for cutting expenses. He’s saved $232 this year by negotiating a lower rate on his car insurance.
Last year, I wrote about my friend Con who got proactive by using some tips he learned in our mentoring program. After some wheeling and dealing with his property manager and lender, he cut $2,184 out of his annual cash flow expenses.
As one ancient Biblical writer once said, “You do not have, because you do not ask…”
7. Keep Your Utility Bills Low
Our household utilities cost us nearly $6,000 last year. That includes phone, internet, electricity, gas and water. Add our mobile bills to that, and we’re up to $8,500 for the year. That’s a lot of money. If we were more proactive, I’m sure we could cut that down significantly.
Here are a few ideas for saving on your utility bills:
- Turn Down The Thermostat. Put on extra layers, and open your curtains when it’s sunny.
- Get Rid Of Foxtel. Choose a more affordable alternative like Netflix.
- Turn Off The Lights. I feel like I’m constantly telling my kids this one.
- Drop Your Internet Package. Skip this option if you have Netflix.
- Trim Down Your Mobile Phone Plans. Is unlimited calls really necessary?
- Stop Upgrading Phones Every Two Years. Gasp!
Another idea I picked up from my friend Matt is to install LED lights throughout your house. LEDs use much less energy than conventional lights. In addition, they don’t emit as much heat as incandescent lighting, saving money on air conditioning. The Victorian government currently has a scheme to upgrade ceiling down lights for free.
8. Be More Industrious In The Kitchen
We’re currently looking for ways to cut down our grocery budget. As a family of eight, this is one of our greatest household expenses.
Here’s a few ideas we’ve had to cut food costs:
- Make Snacks And Lunches Instead of Buying Them. You can save a large amount of money by not purchasing pre-packaged bars and biscuits, as well as lunches.
- Make a Meal Plan For The Week. My wife and I notice a huge difference in our grocery budget during the weeks we plan meals well.
- Make Your Own Soap. My wife just did this, and it was super easy and inexpensive. Homemade soap is natural, so it’s better for you, too.
9. Share Expenses With Family, Friends And Neighbours
Our society has grown more individualistic and less community-minded over the past few decades. This cultural shift has brought with it an economic cost.
How many people on your street have the same lawnmower in their garage or shed just sitting there most of the year. Imagine if instead of buying a new one, you approached a neighbour about going in on one together. You might say, “Well I don’t know my neighbour well enough to do that.” Exactly, that’s the point.
My wife recently approached a trusted friend in our area to start a babysitting swap. She looks after our kids one week, and my wife looks after their kids the next week. We each get two date-nights per week, and we don’t have to pay a babysitter.
It has also automated our system for spending quality time together. Scheduling a babysitter to come to our home was one more step required to get in a date night.
10. Pay Off Your Debts
I was recently speaking to an investor who sold a property in Queensland for a significant profit. She was weighing up whether to put her extra cash in a term deposit account or pay off her personal residence.
Which is more valuable? Interest saved or interest earned?
Benjamin Franklin once said, “A penny saved is a penny earned.” But back when he was alive, they didn’t tax income. In fact, it wasn’t until 1913 in America, and 1915 in Australia, that they instituted income tax.
Today, a dollar saved is worth more than a dollar earned. Each additional dollar you earn is taxed at your marginal tax rate. If that rate is 30 percent, you must earn $1.39 before you have the legal right to save one dollar.
Similarly, if you could find a term deposit that paid you four percent interest on $200,000, you’d initially think, “Hey, I’ll make $8,000 off my money this year.” But after you factor in income tax at a 30 percent rate, you’re net return is closer to three percent.
Assuming you had a $200,000 mortgage with a four percent interest rate, you are better off paying off your mortgage by about $2,000 per year.
Can You Offer Any Other Tips?
The foundation of any savings and investment plan is to systematically keep a budget. Dave Ramsey says, “A budget is telling your money where to go, instead of wondering where it went.”
The only way to identify any wasteful or unnecessary spending successfully is to plan and monitor your cash flow. This level of financial clarity is crucial to reaching your financial goals.
Remember, it doesn’t just matter how much you earn. What’s most important is how much you keep.
What other practical tips can you offer for saving money and cashing up fast?