scary statistics

http://finance.news.com.au/story/0,10166,19696216-462,00.html

According to this article lots of under 40's have no money to save for their retirement. As a result 30% will rely solely on the compulsory superannuation contributions by their employer during their working lives to see them through retirement...

Of course some of the best "saving" is "investing", but what are your best savings tips?

Here's a start:

1) switch to internet phone service...with interstate rellies it's saving us a packet so far...

 

"Of course some of the best "saving" is "investing", but what are your best savings tips?"

Create weekly budget (groceries, bills etc.) in WRITING and stick to it.

 

Hmmm.....

I'm 35 and currently save/invest 100% of my salaried income! That is, it all goes to servicing loans on a $1.5M investment portfolio...

I live off the passive income from that portfolio (primarily share dividends with a little bit of rent and NG tax refund) and my wife's meagre part time income. I know of a few other GenX-ers with similar intent so would say that at least a portion of us under-40's would not fit that stereotypical norm.

Don't you just love generalisations!

Anyway, my tip: bust a gut to invest everything you can in a diversified portfolio and just live off the passive income of that portfolio. Over time increase the equity in the portfolio by letting it pay down its own debt and simultaneously grow via capital gain, thereby increasing your passive income to the point that you can forego your earnt income and retire from PAYG employment.

But maybe that's a bit more than a tip.

Cheers,
Michael.

 

Michael

I think you're absolutely right. Subject to allowing a margin of safety, you can either pay tax or your can pay interest on growth assets.

One is dead money at up to 46.5% (post budget ) and the other is probably somewhere between 7-8%pa at present.

Say you pay 100K tax each year. At a 7.5% interest rate that will support about 1.3M of debt. At 80% LVR that's a 1.625m portfolio.

If that portfolio grows at just 6% that's almost a $100k growth in the first year, compounding each year.

So...I just don't understand why people don't borrow heavily to invest.

 

Even cheaper for O.S and even local calls is Skype-- I used to have long conversations- $130 or so with my son-- overseas in 3rd world-- Now we can phone when we are on line-- a huge saving. I never begrudged the cost of those calls ! He is a geologist so gives me guidance on shares. I also use Skype for local calls when I see my contacts are on line

 

Balboa - not to begrudge you your Skype, but my parents ring me using SkypeOut and it drives me nuts ! I use a (marginally more expensive) managed VoIP service like Nigel mentioned and its quality is like BMW versus the Hyundai-quality of Skype. Its worth a look for sure.

Sorry back to the money-saving, I reckon avoid any retail experience wherever possible - shop online as much as you can (avoid the merchandising in the aisles of supermarkets, bunnings, supercheap auto, and all those types of shops - amazing how much crap you pick up in those places )

Oh, and if you need movies for you or the kids, check out a DVD rental service like QuickFlix instead of the local video store - they mail you the DVD's and you post them back when finished, very cool online tool to browse and save movies, also saves the trip to the store and the other stuff picked up while there

 

Sums it up beautifully Michael. Throw in Nigel's 'margin of safety' point and I think we have a plan!

 

Make your lifestyle a healthy one!

* Limit or don't consume alcoholic drinks
+ Saves plenty of money when you go out with your friends
+ Won't have empty calories in your diet
+ You will never have a hangover and always feel great the next day
+ Initially your friends will think your crazy, but over time you will have more
cash than them and will be healthier

* Eat healthily (Including mainly eating whole foods and preparing meals at home from scratch)
+ Saves money as you are not paying for other people's time in preparing food (packaged food, or take away food)
+ Unprepared food is GST free
+ Your body will show the results and you will feel 100% better

* Do periodic exercise (3-4 times a week)
+ Have plenty of energy meaning you can work harder on obtaining financial freedom and will have clearer thoughts
+ Add's years to your life so that you can enjoy the fruits of your investing
- Gym fees, club memberships, sporting gear

Just some points of the many i can continue on with, but i believe it is a winner.

 

Michael, I don't think the article was written with investors like you (or me, for that matter!) in mind. There are still a great many under 40's who have no appreciating assets outside their PPOR, as they are too busy maintaining an expensive lifestyle and paying off the leases to their brand new cars. Don't forget that keeping up appearances is certainly a priority for a section of the population who prefer to look good, rather than invest for their future.

Saving tips aside from investments (which more or less equate to a forced savings plan) are numerous and many others have no doubt better tips than me, however, with a family I've found the following saves money:

1. Buy in bulk- especially washing powder, dogfood and food wraps/loo paper. You really can save so much doing this.

2. Second Nigel's phone change to Voip. We've done it recently and it's great to know I can chat to my pal in WA all day if I like, for a mere 10c!

3. Pack school lunches. Enough said

4. Take water bottles with you when out to save a small fortune in beverages that cost you an arm and a leg.

5. Recycle and hold garage sales- you'll be amazed at how much you make!

6. Install water saving showerheads immediately. Good for the environment as well as cutting down on water bills.

 

My tip is to always take your own leftovers to work for lunch - and avoid cappucino's for morning and afternoon teas (have a half milk/half water coffee microwaved instead).
You can save this much:
Lunch - $5 , coffees $6 per day - thats $55 per week. Times 48 weeks - $2640 per year.
So after 20 years (take inflation into account), have probably saved at least 45k....

Next - try to survive with 1 car if possible. We did for 8 years - probably saved us at least another 40k or so in petrol, wear/tear , insurance and depreciation.

Join this website (my wife has) , it has some great tips/ saving ideas -
http://www.simplesavings.com.au/

 

Eating my lunch of last night's leftovers as we speak.

and have applied this one too. Our work place has an espresso coffee machine in the lunch room. The beans are a bit bitter and its definately not as good as some of the stuff you can buy, but I have four cups a day and using the work machine saves a motzo.

Good one Dave!
Michael

PS I can't bring myself to sell the MX5 and survive on just one car, even though technically we probably could. I've got to have some indulgences...

 

Sorry, my brain is a bit slow today, but can you please explain this in a bit more detail. It's probably going back to Investing 101, but I think I've missed something.

Say I earn 100K, so I pay $40K tax (that's probably not right, but close enough) and take home $60K.

I then buy 4 average properties, each with a $200 per week shortfall. So it will cost me $40K per year to support these properties. At the end of the year my taxable income will be $60K, which I may have to pay $20K tax, so I take home $40K.

The net effect is that it has only cost me $20K to hold the properties, thanks to negative gearing. So Nigel, isn't that the reason why people don't borrow heavily to invest. Despite negatve gearing it still costs real money to hold the investments, so there is a limit to how much you can invest if you still want to eat.

Am I missing something?

John.

 

John,

You're assuming its all in negatively geared properties. About half my borrowings is against positively geared managed funds generating me an income. Using your numbers:

I earn $100K gross salary and pay $40K tax. I'm left with $60K net income. I use that entire net income to service loans. Yep, I invest 100% as I posted above. But those investments give me tax breaks plus passive income, so my investments earn me say $40K (net of tax paid on MF profits) a year which I then live on. In my case I've also got my wife's meagre income to help pay the grocery bills.

I live off that reduced income of $40K instead of $60K net, but as a bonus I get to keep all of the capital gain on my investments! That's where I'm really making my money. $60K in interest bills would mean about $1M in investments at 6%pa interest only. If half of that is managed funds then I only get a little bit of growth as this is really my income source, but half in properties doing 10%pa on long-term average for the sake of some numbers. So, my CG is $50K on properties and say $10K on managed funds, so my total return is $60K CG tax free plus $40K in net income. My $100K net beats my uninvested $60K net by 67%, i.e. 2/3 as much again.

In summary:

Net Income:
$60K salary net of tax
$40K managed funds net of tax and CG deductions on IPs

Expenses:
$60K interest on loans

Assets ($1M in total)
$500K property (earning 10%pa CG = $50K)
$500K managed funds (earning 2%pa CG = $10K, earning 8% net of tax income = $40K)

Cheers,
Michael.

 

Ahhhh (light bulb goes on!)

Thanks for that Michael. So what you're really doing is converting your normal income to a larger amount of growth in your portfolio (thanks to leverage), but this can only be done if you also have sufficient income from your portfolio.

Very good.

John.

 

Nice work Michael!

I'm part of the scary statistic. I'm 38 (39 in Feb). Only have a little bit of superannuation, and currently dont have savings. My income is approx 50k. I have about 17k of consumer debt plus mortgage of 171k for a 180k unit in Hobart. This year I want to get into managed funds. I want to clear two smaller debts (each just over 2k) which will free 250 a month. That would be handy as regular installements on a managed fund. My motorcyle loan is approximatly 11k now (for a Moto Guzzi worth approx 14k). (I plan for it to be the last loan I have for a depreciating asset)

I really wanted to get started into property investing but the entry costs seem prohibitive compared to shares and funds.

I plan to test the water by putting 1k into a manged fund (through comsec) and monthly add $250 to it (at a minimum). At the same time I'll pay down my consumer debt. (the mortgage is fixed for 5 years, we are limited as to how much extra we are allowed to put into it)

Once my consumer debt is out of the way, would getting a margin loan for small cap funds be the way to go?

 

Getting a margin loan can be great, I love mine, but don't limit yourself to 'small caps funds' or any one particular type. I started my margin loan with 25k but with the ability to increase it to 100k so as the value increases (hopefully) I can buy more of whatever I feel like at the time.

Keep your mind open, don't limit your thoughts too much.

BR

 

Thanks Bantam,
My wife and I have put some left over wedding money and proceeds from the sale of her motorbike into navra wholesale fund via e*trade. We have $2650 waiting to be processed by the fund manager.

We could have used that money to pay off one of my smaller debts, but we are quite independent from each other financially. Once my debts are out of the way then its full speed ahead with regular navra installments (probably 1000 every month initially) and at some stage some diversification with other funds. Getting rid of my debts would gain me approx $700 cash flow a month to put towards investing.

 

A slightly different slant on this is to use OPM (other peoples money) to invest from the start.

One of our nephews just started his first job, with the RAAF, so he has secure income and lots of spare money which he has been frittering away so far. He could save money regularly from his after tax income to invest, which we have encouraged him to do.

However, another (quicker) option is for him to get a personal loan for about $5000, which some employer credit unions will do if income is secure. He can then get a margin loan for another $5000 to $10,000 dollars (Bank of Qld, LE) and invest it in a range of high growth funds i.e. geared shares, listed property trusts, small companies, and even a bit in Asia. This spreads the risk around (our spread is similar to this and has barely hiccupped so far with the recent market fall, although naturally the asian fund is down a bit).

Anyway, the benefits of this approach are many:
- he is using pre-tax income to invest (pay yourself first)
- all the interest is deductible and will greatly reduce or even wipe out his tax bill
- because he is invested in growth funds, growing at 20% to 50% annually he can capitalize the margin loan interest (i.e. not pay it, as it will only grow at 8-9%). However if he does pay it his equity will grow more quickly, and he can buy more funds with this extra growth
- he is forced to save, as his employer deducts the credit union loan payments from his pay before he has a chance to fritter it away
- even though he may pay 7% to 8% interest on his credit union loan, it enables him to start now and benefit from the massive compounding effect of funds growing at such high rates. (Of course this growth may not last forever, which seems to me all the more reason to start now).
- he can buy an investment property much sooner. As his funds value grows, he can draw down a deposit for a house from the increased equity. Thus he does not have to sell his funds and trigger Capital Gains Tax.

Anyway, that is our take on this. I wish someone had told me all this when I was 18.

Cheers
Seaview
-

 

Seaview, I think your approach is a good one...just some comments below...

ps. I don't mean these as criticisms, just observations. You're advice could set your nephew on the road to wealth!