Saving money is one of the first habits to learn when you have decided to become a property investor. Getting started with saving requires taking one single step. This fundamental first step is to come up with a plan to start saving.
Once you’ve made the decision to take that first step and beyond, you’ll find yourself becoming hyper aware of your spending habits. You’ll find it far easier to reprioritise where your salary goes so that you can commit to your savings plan. Budgeting well will become your new habit – and a lifelong one at that.
On the go? Here’s 30 seconds of key take outs:
- Before you start saving for a deposit on an investment property, get some good practice by saving for an emergency fund or buffer, first.
- Once you have your buffer set aside for emergencies, you need to prioritise paying down your credit card or personal debts, starting with those attracting the highest interest.
- By developing a habit of paying off your debts, once you’ve got your debt under control you can then simply redirect what you were paying into debt reduction, straight into your savings.
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“The art is not making money, but keeping it”
Importantly, learning how to adopt a savings plan mentality is good for you in many ways beyond saving for your first deposit on a property. How you handle money throughout your life can affect your levels of stress, your financial success, the choices you have in front of you at any one time, and ultimately your financial independence.
And the solution to being able to save lies in basic mathematics. You must spend less than you earn each week, fortnight or month. Once you achieve this, you can start your savings plan.
Spending less is not the way to become wealthy. That is just a myth as it is only a part of the story.
With the cost of living, taxes and inflation, it is difficult to save your way to prosperity on your personal budget surplus alone. Unless you’re earning $1m per annum, you need a leverage and compound effect on the money you can put aside.
You need to get an understanding of how much money you can save. That can include scanning your weekly budget and prioritising your spending. Once you’re committed to a savings plan, you’ll think differently about throwing away $5 on an unnecessary snack at the service station, as you go to pay for your fuel.
How much can you save?
How much should you save is an irrelevant consideration. The question is how much can you save based on your current living and working arrangements?
To work this out, you need to be intimately aware of the ins and outs of your spending habits. It’s so easy to fall into the trap of losing track of your spending, and yet with budgeting tools literally at your fingertips in the form of free apps there is no excuse for blowing your budget.
How much money you can save will depend upon your current circumstances ¾ your work situation and your lifestyle preferences will determine the amount of money you need to keep aside as your buffer. A buffer is important to cover things when life doesn’t go according to plan. Having a stash of cash can help get you out of a sticky situation so you can keep moving forward.
Saving money can challenging. The following five tips should help you get on top of these important habits of the successful property investor.
How to get started on a savings plan
Before you do anything else you must have a weekly, monthly or annual budget. Start your budget by working out the cost of basic living – your minimum viable budget or what you need to simply survive. Work through a full year’s worth of your expenses, starting with the essentials – rent (or mortgage payments and rates); energy bills; telephone and internet; medical and dental; groceries; basic insurances and car and transport costs.
Use our free online budget planner to get started. You’ll find it at Capital Properties > Investor Tools and Apps > Budget Planner.
Before you start putting aside savings for your first property investment, you need to put a plan in place to save yourself an emergency fund or buffer. This will put you in excellent practice to then start saving to invest.
Your savings plan starts with your end goals
Everyone kind of knows that saving money is one of those smart things we should all do but how do you know how much money you should be saving?
This question relates back to a whole other topic and that is defining what your goals are, and more specifically, where you want to be financially in the future.
Defining where you want to be in the future will have an influence on how much you should be saving. There are a lot of variables to consider in working this out.
A good starting point is to consider the end state – that is, how much do you want to retire on in terms of passive income per annum? And then, what capital and returns do you need to produce that income. Then, how much of a deposit do you need to invest in capital that will give you the returns you need.
To give you a rough idea of how much you can save, if you put away $375 per week over 30 months or 2.5 years, you’ll have saved $45,000.
An emergency fund or buffer is your first port of call
Being an investor with an emergency buffer can make a significant difference to your stress levels, and your success. If you want to be able to sleep at night knowing that you can cover your next mortgage payment if your property is unexpectedly sitting vacant, start saving your emergency fund or buffer.
Riding through market contractions with white knuckles, or losing sleep night after night is not a very appealing journey. We want you to feel excited about tomorrow because it brings you closer to your goals.
Use learning to save and building your emergency fund, as great practice for developing your new savings habit.
Pay off personal loans, credit cards and store cards tax debts
Once you’ve built your emergency buffer, the next most logical step is to pay off any debts starting with those attracting the highest interest.
Prioritise paying down your debts based on the level of interest you’re paying. Consider setting up direct debits so you can pay down a set amount automatically – I find this a convenient and effective way of knocking down debt. It can be a lengthy process to reduce your debt, but if you stick with it and always pay down as much as you possibly can, you’ll get there. At the same time, you’re flexing your budgeting muscles and strengthening good financial habits to manage your budgets well and change your spending habits.
In turn, this creates a positive snow ball effect. As you pay down the debts faster, you’re freeing up disposable income to pay down the remainder of the debts.
Create a savings plan
Once you get your credit card debt, personal debt and extraneous spending habits under control you can redirect the payments you’ve got used to making to reduce your debts, straight into your savings account.
Calculate a realistic amount that you can comfortably put away each fortnight (or weekly or monthly).
Set up a direct debit transfer that you can (almost) forget about. Calculate an optimist and pessimistic figure of realistic savings. What I mean by that is in a bad week – how much could you put aside, versus a good week? Put away the optimistic amount to begin with, knowing that if you have a week that is more challenging, you can still put some savings aside, just not as much. That way, you’ll get a sense over time if the amount you’re tipping into savings is sustainable.
Got your savings and looking for the next step? Book in to our Capital Properties’ Free Discovery Session.