Your Income

After being mortgage brokers for many years it becomes apparent that it does not matter what your income is ­ it's what you do with your income that really counts. We see people earning $100,000 per annum who cannot save themselves even a 5% deposit. We also see people earning one third of this income level but amassing sizeable property portfolios. One example is a Vietnamese client of ours who came to NZ with nothing only 20 years ago. He has always earned a moderate wage but is now a multi-millionaire property investor.

How to Save Money

Spend less than you earn. Sound like a simple concept? It is! But saving is so hard! There are so many enticing advertisements for the latest consumer goods ­ resist! And do a budget. Foregoing present consumption means you will have much more in the future. The world's greatest investor, Warren Buffett, the world's third richest man, decided against buying his baby a cot when Warren was in his twenties, deciding instead to make one himself out of a drawer and blankets. Buffett, who has averaged 25% per annum in his investing career reasoned that the $100 to purchase a cot would be worth thousands of dollars in the future due to the power of compound interest. Now that example is a little extreme of course but you get the idea of how powerful compound interest can be.

Approved's Top Twelve Saving Tips:

1. Be frugal. This is the number one way to make your money go further. Make your own lunches, don't buy expensive clothes, and never buy new cars, and especially don't borrow money that you don't need ­ car loans are one of the biggest destroyers of income that we see!

2. Don't keep up with the Jones'. 'Allocating time and money in the pursuit of looking superior often has a predictable outcome: inferior economic achievement' (The Millionaire Next Door by Thomas Stanley and William Danko). Buy assets. Assets provide an income, liabilities don't. Read 'Rich Dad Poor Dad' by Robert Kiyosaki to find out about the difference between assets and liabilities.

3. Establish clearly defined written goals. There was a famous survey at Harvard University about written goals. The researchers surveyed found that the graduates with written goals equated to 3% of the graduation year. Twenty years later this same year was surveyed again. The 3% with written goals were not only happier and more satisfied with their lives but the financial numbers also had a remarkable conclusion: the 3% with written goals had achieved more wealth than the 97% added together! So set written goals! If they are not written and read each day there is little point in having them ­ so get writing.
   

4. Minimise taxation ­ tax is likely to be your largest expense by far. Learn how to minimise it. Establish a company to help create tax-deductible expenses. Purchasing a rental property would be a great way to start minimising tax (see rental properties).
   

5. Establish your own business. Two thirds of American millionaires are self-employed whilst the general population consists of only 20% of self-employed people ­ we expect this is probably fairly similar in NZ as well.
   

6. Budget. "Whatever you have, spend less." - Samuel Johnson. According to 'The Millionaire Next Door' over half of the millionaires have budgets for monthly expenditure, nearly all of the other half invested a large proportion of their income (a concept known as 'pay yourself first') before spending money, hence they had a 'forced' budget anyway.
   
   Why not do this NOW! Print off the following simple form and find out where all that money is disappearing, if you can't find anywhere you can save money I shall eat my hat! By budgeting and recording how much you spend each DAY, you can quickly realise after a month or so that you're wasting hundreds of dollars where you needn't ­ when you think about how much you could save by paying those hundreds off your mortgage you'll wonder why you never did a budget in the past. Don't need a budget? Imagine being a shareholder in a company that suddenly announces to its shareholders that 'from now on the company will not budget anything' Shareholders would run a mile!
   
   
   

   Household/property	Amount	Food	Amount	Entertainment	Amount
   Rates/water		Groceries		Sky TV
   Gas		Lunches		Books
   Electricity		Takeaways		CD's
   Phone		Bars		Newspapers/mags
   Lawn-mowing		Restaurants		Videos/movies
   Security system		Snacks		Holidays
   TOTALS		TOTAL		TOTAL
   Transport		Financial		Health/Education
   Petrol		Superannuation		Doctor
   Servicing		Accountancy		Dentist
   Repairs/maintenance		Legal fees		Optometrist
   Tyres/W.O.F		Child support		Medication
   Registration		Provisional tax		Vet bills
   Parking		GST		Education fees
   Bus/trains/taxis		Savings plans		School body
   TOTAL		TOTAL		TOTAL
   Household		Clothes/personal		Insurances
   Renovations		Clothing		Life
   Appliances		Haircuts		Health
   Furniture		Skin care/beauty		Income protection
   House painting		Sports m'ships		Home/contents
   Landscaping		Dry cleaning		Car
   TOTAL		TOTAL		TOTAL
   Personal Loans		Miscellaneous
   Personal loan		Donations
   Car loan		Xmas gifts
   Credit Cards		Birthday gifts
   Store Cards		Sports equipment
   Hire Purchases		Hobbies
   TOTAL		TOTAL		GRAND TOTAL

   
   
   Click here for a printable version of this budget form

   Other budgeting tips include stopping smoking ­ a packet of Winfield Red costs $10.05 - a packet a day therefore equals $3,668 per annum. But it's actually more than this amount ­ remember the income you receive is taxed by the government first! Giving up drinking can also substantially reduce costs and you'll never regret not having another hangover!

   A tip from Anita Bell's book 'Pay Your Mortgage Off in Five Years' is to make your own dog-food ­ either read Anita's book or go to these web sites for a few recipes: www.twodogpress.com/dogfood.html or http://soar.berkeley.edu/recipes/dog/indexall.html. Or for your cat: http://www.fosselman.com/recipe.html

7. If you get a pay rise or if interest rates come down, don't decrease your repayments ­ pay the same and the loan term can be decreased dramatically. On a $200,000 loan at 9% per annum an additional $20 per week will cut four years off your mortgage.

8. Use Revolving Credit effectively. Revolving Credit Facilities (RCFs) operate like a big overdraft and are sometimes referred to as 'flexible' or 'overdraft' mortgages. RCFs may be the ideal mortgage option for the following reasons:
   • Flexible repayments and easy access
   • Interest savings where spending is disciplined
   • Combining day-to-day finances with your loan account

   RCFs operate like a normal bank account with chequebook and bankcard facilities. You can access the funds if you require, or you can leave it to operate like a normal loan account. Some RCFs allow you to borrow back up to the limit without bank approval.

   You can arrange for your salary to be direct credited to your loan account reducing the outstanding amount on your loan straight away, and because the interest is calculated daily your interest bill is reduced as soon as the money hits the RCF. Over time, this system reduces the interest costs of your loan, helping repay your loan quicker, if you budget well you can pay off your loan much faster.

   A further way to save on interest is to use your credit card to pay for your living costs. You then repay the credit card from your RCF (the credit card is interest free until the due payment date). The RCF has all of your pay until the last possible day, which reduces your average loan balance. This reduces your average interest charges, which shortens the term of your loan.

   You can use your RCF as your cheque, savings and loan account. With your salary going into the RCF and an ATM card, you won't need a cheque account. Extra money can be used to reduce your loan so you won't need a savings account ­ and you can re-access this money whenever you want.

   RCFs are not for everyone ­ successfully running an RCF requires disciplined repayment and spending habits. While a huge, flexible overdraft may sound great, a floating rate mortgage still allows you to make lump sums payments, as well as providing the consistency of fixed repayments.

   NOTE: mortgage 'eliminator' type products with huge establishment costs are often just revolving credit facilities with a budget attached.

9. Use your time productively. Don't waste time watching television, do something a little more productive ­ read books about how you can increase your wealth.

10. Choose employment that you enjoy, this way you will enjoy earning the wealth creation process!

11. Never pay interest on credit cards or other debt. It quickly mounts up and becomes a major burden.

12. Save money on banking fees. The additional few dollars that can be generated by avoiding certain bank fees can also dramatically decrease the term of your loan.

Next: Investing in Rental Property

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