“You have to BE before you can DO and DO before you can HAVE.” - Zig Ziglar
Hooray, we are at the pointy end now. Well done.
My wish for you is that you have discovered some things along this journey that will help give you the confidence to keep going. Now that you KNOW YOUR NUMBERS you can definitely CONTROL the majority of them and when (and there will be a 'when') things go haywire, you will be able to refocus on what you need to do, to get out of the situation. You will be able to move forward and rebound fast as you are BUILDING your numbers to Wealth for you and your family ... for FUTURE U!
I am proud of you and me for getting this all down on paper 😀 ... a pat on the back all-round!
This section is all about the avenues you can go down on your journey to financial freedom. This is what Financial Literacy is all about. You will not just let others around the BBQ or a professional tell you what you should be doing. You will be armed with your numbers, know what you are managing month to month, year to year, and where you are GOING. That's the key. How can you know where you're going if you don't know where you are right now?! 😀
So, we have our buckets/accounts where money moves frequently to pay expenses that need to be paid. You have large recurring expenses on the calendar to remind you to review regularly as they should not be left as a set-and-forget expense. The 'set-and-forget' mentality on expenses can cost you dollars and it is so much better if those dollars are in your investment pockets instead!
Next, we get to ensure that we are secure with an emergency fund, insurances and a goal of where we are 'roughly' headed.
Now, we look at the options.
This is in no way financial advice, these are ideas for you to explore for yourself, seek professional advice with SPECIFIC questions and even dabble in some strategies to get your feet wet.
Options to build WEALTH
If you have your PPoR (principal place of residence), get the mortgage to at least 50% of the value of the property (bank speak: LVR - stands for Loan to Value Ratio, it is the percentage of the money you borrow for a home loan, compared to the value of the property). If your property is worth $800,000 and your home loan is under $400,000 then pay the minimum P&I (principal and interest) AND use any extra you have towards an investment that you can generate some tax savings from. This will start the compounding magic in something other than your PPoR. I will stress that this may work well in 2021 with our home loan interest rates at 2-3%. This would certainly not work as well if home loan interest rates were at 7-10%. So this type of research and strategy needs to be reviewed carefully with current events. As usual, you would still annually hustle for a review of your home loan interest rates and just keeping paying what your original minimum P&I repayment was.
This is a touchy topic for some. Depending on your emotional connection in owing the bank. Reviewing this from a purely wealth-building exercise, any extra money you have available to invest would benefit you in other investments.
A subset of this could also be DEBT RECYCLING. With the above example of owing 50% of the value of your property, you could borrow against your home to purchase shares/ETFs or a deposit for an investment property. This does need solid calculations, a long-term plan, and a good emergency fund so that you can sleep at night. If you have all your ducks in a row, this type of strategy can assist in building your wealth whilst utilising the appreciating asset you have 'under your roof' and receive some tax offset benefits.
Stock Exchange for a Passive Income
Check out Tracey Edwards on YouTube as she goes through how she reviews companies to determine which shares to purchase and also what you're considering; annual dividend income, or appreciation. Try this one and this one to start.
It comes down to your choice. Banks, Mining and Consumer type companies are pretty stable if you did want to have actual shares. We have Commonwealth Bank, National Bank, and also Woolworths. Again, this should be pretty much a set-and-forget strategy however as it's specific companies you may need to watch it a little more. I prefer the ETF/LIC options as they are always recalibrating so the mix is hundreds of best-performing companies at any given time. There is a small annual fee with ETF/LICs whereas purchasing shares directly has no fees.
ETF (Exchange Traded Fund) / LIC (Listed Investment Company)
You can purchase on the stock exchange just like a regular share, however, the special thing with these is that you are purchasing a fraction of a percentage of hundreds of companies. Vanguard Australian ETF - VAS is 300 of Australian top-performing companies.
I reckon ETFs that are dividend reinvested (DDR) for a 10+ year term is the way to go with regards to buying and then literally 'set-and-forget'.
With either option, you can outright buy under your name or under a trust, or even in trust for your kids (when they turn 18, the shares are automatically transferred to their name), more on this in my Kids Series post.
Depending on your age and how much you want to put under this umbrella, you can go with the cute apps like Spaceship that can be great with a few thousand OR go to a brokerage account. Commsec, SelfWealth, or Pealer. You can invest with as little as $500 and you will normally be charged a brokerage fee ($10-20). It's your choice and your research to see what you would prefer. If you want to set up a reoccurring purchase Pearler has this option. You can even buy US shares if you wish (with SelfWealth and Pearler coming soon I think). Check who offers this at the time.
Don't look at the ups and downs ... you're not a 'day trader' and you are not gambling. You are in this for the long term. In 10+ years after you have accumulated a nice nest egg, you could then switch off DDR and start reaping the dividends as an income. Most have dividends twice/four times a year. Perhaps at the same time, you can transition to part-time work.
Its also best to mention that you always need to consider your tax situation to ensure that any strategy gives you the best tax offset or that you at least understand any tax implications.
If you are in a high tax bracket or do not want to have to declare your investment each year, there are other options to build wealth. Investment BONDS or an LIC that has the DSSP reinvestment option so you do not have to declare your investment earnings at tax time. A family trust is another possibility. These options are available to all of us if we know what to ask and seek professional advice (can be a Financial Planner and/or an Accountant) to work through the best strategy for your goals and situation. Why pay more tax than you have to?!
Investment Property and splitting / subdividing your land to receive dual rent.
Lots of different options under this umbrella. It is a steep investment, unlike shares where you can start with as little as $500, property runs in the hundreds of thousands. It is for the long term and you do need to keep emotions out of it. Numbers don't lie and checklists are really important to ensure you keep on track. If you want to go down the path of property a few ideas to ponder.
Buy a unit
Look for 2 bedroom apartments, walkups (no lifts, pools, gyms as strata costs are higher) and close to public transport. Ensure the sinking fund for the complex is healthy.
Add a Granny flat
Does the house have a good land size that you could possibly add a granny flat? This is more popular in Sydney with housing pricing so high. Close to transport, side access could make a great option for a granny flat. Potential dual-income example in a suburb 15km from Sydney CBD:
650 sqm block - preferably corner block
Live in the main house
Build 2 bedroom granny flat with a side entrance (corner blocks are ideal for this)
Rent out granny flat for $500 per week (cost of $120,000)
When the property is paid off, you could even rent out the main house for $800 and granny flat for $500. Total income $1300 per week. $60k+ per year ... That's a nice income in retirement! 😀
Build a duplex
This is my favourite. I am biased due to us doing this nearly 10 years ago (refer to this previous post for more details). Purchase a property that meets the local council's rules to build a duplex. If you already own a property and it meets council regulations this could be a moneymaker for you to knock down and build. Now, this option again is very Sydney-related. I had this idea for Brisbane but it's not time yet for that State. If you are in an HCOL (high cost of living) city, this may work. Example; the property/ land costs you $1,000,000 and building costs cost you $800,000 to build 2 x 4 bedroom & 2 bathroom homes. Total cost $1.8m. You can sell one for $1.4m and be left with a $400,000 mortgage OR have a mortgage on each property of $900,000. Rent them both OR rent one and live in the other. The rental could potentially be interest-only for a few years so that you don't have to be contributing as much towards the loan and you pay down the one you live in. Now if you already had equity in the property before you started, then that would be offset against your home.
Initial outlay $1,000,000
Build costs $ 800,000
Total $1,800,000 / 2 properties = $900,000 each
Loan $900,000 each @ 3% interest = $27,000 pa to the bank
Rent $700 pw = $36,400 pa gross rent
Tax deductable depreciation offsets your income tax = $2000-4000 pa tax refund
OR you could sell one and live in the other (reminder of capital gains tax though!)
I loved the whole process of building the duplex. A lot of planning needs to be done, but it can work. When I was researching duplex's there weren't a lot of builders out there doing this, but now a decade on, there are heaps. Go to seminars and open houses and talk to builders. It has great potential for wealth-building if you are sitting on a good block (a corner block is even better as the frontages of each home can be totally separate!).
What's your age?
Depending on how long you have to go before you reach the standard retirement age could determine some of the strategies you use.
Example: Someone in their 20's vs someone in their 50's would be harnessing different strategies and also are at opposite ends of the 'life' scale. The former is just starting out with home, career, family, kids and the latter are possibly at their highest-earning capacity, empty nester, partial ownership of PPoR. AND the elephant in the room, the number of years for compounding to work its magic!
The 20-somethings could be pumping up super/retirement fund to a certain level and let go a bit as time is on their side for their super/retirement fund to kick into millionaire status. With the main stash of earnings, they would be purchasing property and getting it to 50% LVR and then pumping in as much of their own money AND borrowing to purchasing other property or shares/ETFs. The interest payable on this 'good debt' could be offset against their taxes to assist in paying down these loans.
The TRIO strategy:
Uno: Retirement Fund - focus at the beginning of the journey and then let it runs its course
Super/Retirement Account with some focus for 5 years and then let it run its cause. If working until 60 and then taking an income, the money will never run out.
Due: Invest in ETFs/Share portfolio every month for 20 years. You could start at 25 or 30 and be done by 50 with a nice income stream to help along until you can tap into your super fund.
Share/ETF portfolio on a monthly investing plan. Interest exceeds deposits after the 18 year mark so 20 years works well. The drawdown of 4% could give $45,000 pa for passive income until your superfund kicks in.
TRE: Purchase a property. A good rule is to try and keep the mortgage repayment to no more than 20% of your income.
THE KEY in this age group is to purchase PPoR that is less than what you can afford so that you can get to 50% as fast as possible. If renting is the alternative, then rent below your means and pump as much into accumulating investments to keep you above inflation and aggressively accumulating.
For the 50-something person, you have a different timeframe and in turn, a different strategy to consider. With less than a decade to be able to tap into the super/retirement fund and the current government legislation that has tax benefits for increasing your super wealth, a sound option is to salary sacrifice to the maximum and also if possible backdate as far as you can to pump as much into your retirement fund. Options to also add up to $400,000 per person into your fund. With this top-up, there are no tax benefits to offset your salary, however, it will boost your investment for compounding to get a kick along. There is a ruling you can only add $300k in a 3 year period however if you add $100k in June of one year, then you could add $300k in July (beginning of the new financial year) as a one-time boost. That $400k can work wonders. Where do you find this $400k? Debt recycling could be an option!
The first example below has bulk contributions and all focus on investing within the superfund. At 60 when a passive income is generated, the yearly closing value continues to rise, therefore the couple does not eat into the capital when taking out a yearly income (tax-free I might add!).
The below example has some salary sacrifice to catch up, however, at 60 it would not be advisable to take an income as the yearly closing value is reducing and potentially have a zero balance at age 75! Either continue to work until 65-67 or look at ways to boost the contributions.
In STEP 9 our personal example had a calculation of $2,197,000 needed in a share portfolio to reach the $113,000pa passive income. We are at $370,000 so we have a long way to go.
Below are some of the points to consider for our situation. Some, or all, may resonate with you. When the below points show up as 'strong' (the ticks), using some of the above strategies to boost investment using Debt recycling could assist us in getting us closer to our goal. We would need to have all of these points ticked before we can take loans to boost our wealth further. Knowing if you are strong or weak in these points will help you move in the right direction, or assist when talking to a professional.
What's our current LVR on our PPoR? We owe 33% of the value of our home to the bank
How stable are our jobs? I am less than a year at my job and hubby just started a new job
What's the difference between our Expenses and Income to determine how much we have per month to invest? Current income =$9000 / month v's Expenses $8000, therefore only have $1000 as potential to invest/salary sacrifice.
What is our risk tolerance (consider both individually)? Aggressive for 5-8 years then review
What major expenses are coming up in the next 5-10 years that we need to consider? Travel and assist kids with car/property
Do we have a healthy emergency fund? No, we only have 6 weeks worth of EF
Are our insurances (Life, TPD, and Income Protection) topped up enough for the risk we may take? I do have all three, however hubby does not have Income Protection at the moment.
What is our tax bracket and what can we max out in our super/retirement if we choose that path and strategy? Tax bracket 32.5c so the advantage of any tax offset would be around 32% refund.
It's important to assess where you are. Write down these points, as they are great items for discussion with a Financial Planner or Broker to determine if you are at the stage to go into a larger investment strategy. If you start off small, then make it a plan in your budget and start automating the investment. No matter if you start with a hundred dollars a week/month or a thousand dollars, the main point is that you have STARTED.
Look forward to hearing your music and how you are building wealth.
That's a wrap!
I will be using these steps in my own journey as we strengthen our strategy and work through life. As we work through these steps, I will share them on my IG and FB accounts plus on my website.
If you have enjoyed this series, please send me a DM or email me at firstname.lastname@example.org and let me know what you liked/disliked and how you are going on your journey.
Repeat after me "I AM Building Wealth" 😀