First let’s be clear. We do not live on tins of baked beans or substitute gravel for toilet paper. Ouch!
Secondly the $50,000 in additional savings we are accumulating is not from any increase in income or side gigs.
Our savings are purely from implementing smarter ways and choices to legally keep more money in our pockets instead of others.
Thirdly, we’re not special.
We have the same amount of time and days in a week to do everything we need to do just like you.
Lastly we also each have average incomes. Disclosure we pay ourselves $73,060 (after tax) or $100,000 gross annually.
So how did we do it? How have we found these additional $50,000 in savings annually without cutting back on our necessities and quality of life?
More importantly, can you too achieve these levels of savings or more?
The short answer is “Yes you can".
You simply need to decide on what you want, identify the price, and decide if you are willing to pay and if so pay the price. Then get on with it.
Simple but not easy!
For me the biggest hurdle to achieving anything important to me in life has always been overcoming the inner voices of self-doubt and remaining persistent and committed to the task at hand.
How can we maintain our motivation when we don’t feel like doing the work?
How can we stay the course when we are constantly dazzled and distracted by alternative choices?
How do we break the boredom, and to keep going when it feels like we’ve been plateauing for so long, we’re so far from our destination and its just not fun or interesting anymore?
I have received many, many, many blessings over my life from my parents, however the most valuable of all was in the blessing, support and commitment to my swimming throughout my youth and teenage years..
For twelve plus years, each morning my father would tickle the souls of my feet at 4.45 am to wake me up, then blurred eyed drive me to a swimming pool ( 40 km away) six mornings a week. Then after more time in the pool, five afternoons a week my mother took up the responsibility batten by getting me home each night by 6.30 pm only to then prepare dinner for the family, homework etc.. By the way she had a full time job too. This went on winter, summer, spring and fall, school holidays and during school terms.
A herculean effort of support that set me up for life. Thanks Mum and Dad.
The two most important lessons I learnt.
Choose one thing. Do it to the best of your ability and stay the course. And the second is be accountable to someone; because there are going to be times when self-motivation alone is not going to get you out of bed or into that pool. Especially if it's a cold winter’s morning.
Sure I was a good at swimming. It was my teenage identity and I relished in it, but want took me even further was my and my parents persistence and staying the course of commitment.
And I got to experience the rewards of this commitment each year at swimming national titles. I saw less and less of my prior competition on the blocks beside me. This fact alone still today empowers me so, to do better, hold the line and stay the course.
Now back to finances..
Firstly let’s call saving money out, for what it is.
Saving money is boring, painful and takes all the the fun out of life. “It's a traffic light when you’re already late or a no-smoking sign on your cigarette break”- Thanks Alanis.
Do you think I longed to get into that pool of cold water on a winters morning at 5.30 am because it was fun? No it was not!
Every time I would brace myself for the shock of cold before I dived in. But then I did because. I dived in because I had momentum on my side i.e. I was already there to swim and I was a long 40 km from home by car. Also I had limited my options down to a choice and action. And by actioning this choice I chose to and accept the initial and brief discomfort, shocking and painful at first but then soon after I’d forgotten and moved on.
Just like when choosing to save $50,000 annually. It’s painful and a really uncomfortable and a shock at first, but you soon get used to it and life gets back to a resemblance of normality.
Also saving money like swimming can also get very boring very quickly. I was so bored and tired when swimming, sometimes I would mistakenly hit my head on the pool end because I had slipped into a sleep swim. With the hypnotic rhythm of swimming and the blurred black line beneath......
How do you stay motivated watching that black line…Up and back, up and back for 5 km some times 6.5 km each morning.
Simple you take your mind off into your own little world. You go there to solve your problems. You count laps, you talk to yourself and you sing. You study, you pace yourself, you focus on your sets, you push yourself and you do the work.
When it comes to maintaining your savings maintaining a constant cadence, just like like swimming is all important.
And whats cadence? It's just a fancy word to describe rhythm and repetition. The beauty of cadence is once you master your skill you can start to multi task without loosing your rhythm. i.e. with a automatic savings plan in place often up to 80% of the time you can in effect take your mind off the task and engage it in other activities that don’t stop you saving but keep you entertained along your journey..
So while you are saving money we can also go running. Even better exercise is free and healthy for you. So too is borrowing a book from a library, doing chores around the home. Writing a blog, attend a free community college class. There are so many ways we can invest in experiences that have a direct benefit to us without costing a cent, while you continue to save towards your financial goals..
The other 20% of our time, simply because we are doing the work we will naturally want to improve.
Again no money is required to research alternative strategies, or benchmark our progress, fine tune our goal plans or revisit a better deal from your service providers. The point is focusing and doing self-improvement and analysis 100% of the time will burn you out.
Achieving financial independence is a marathon not a sprint.
Finally regarding savings and the money fun police.
At the time I thought I was missing out on friends parties, joining my mates in other sports, studying, scouts, or whatever others talked about but I wasn't there because I was in the pool training. The truth was that I wasn’t missing out at all. In fact swimming instead of partying kept me out of trouble instead of getting into it.
Any sport we choose encourages us into a healthier lifestyle and generally healthier interests. So too does embracing greater savings.
Being focused on sports naturally meant I was interested in eating healthier, becoming stronger, engaging in other sports instead of, hours of watching TV and less healthy lifestyle pursuits.
In my experience, saving regularly gravitated me to have greater self interest in ways to better manage my finances, distance myself from the trap of instant gratification and helped me to place greater value on maintaining things that are important and special to me. And just like in the pool when trying to beat my best time, the challenge of saving more became fun and engaging challenge to do too.
So bottom line how did we find and maintain $50,000 a year in savings?
A large part was via wealth creation and legal tax minimization, the balance was in the form of savings to our daily expenses.
Applying maximum salary sacrificing up to $25,000 each into superannuation we minimized our taxable income down to $75,000 which saves us $4,825 each in tax per year or $9,650 total annually, this figure is net tax savings after paying 15% contributions tax into our superannuation.
The benefit of doing this is that it not only moved us into a lower bracket, our money is now growing in a low tax environment (15% annually) money in superannuation is protected from creditors and currently is tax free on withdrawal after age sixty and no longer at work.
Becoming a single car household. Savings achieved $5,000 annually. As we work together we only require a single car. For the time we are in different placed we use Uber about once a month costing $500 annually.
General food savings, 2:4:1 meals and discount vouchers. We now hold ourselves accountable to a budget of $150 per week which includes our dinners out. Doing so keeps our total cost annually to a measurable $7,800 annually however previously it was un checked and often over $350 per week or $18,200 annually.
Previously we would often buy lunches instead of making them. Before we would by single meals, now we buy bulk items on sale. We use soda stream instead of buying bottles of mineral water and we have a simple coffee machine at work and home saving us $10 a day on coffee's . Total savings achieved $10,000 annually.
We also expanded our business with a business acquisition. While this new business acquisition has substantially increased our earnings, these earnings are retained within our company and are being used to pay down borrowings which we project to be nil by 2020.
The benefit of structuring this acquisition asset with borrowed monies is that borrowing costs are deductible. While this has increased our costs, by $20,000 (4% interest cost on $500,000) based on company tax of 27.5% gives the business a tax savings of $5,500 annually along with an increase in revenue of $200,000 (which we have excluded in our $50,000 of savings). The good news is that when this loan is fully paid this will also result in businesses income to increase by $20,000 as this amount represents the current annual interest on loan borrowing costs.
In this process of expanding our business we also relocated to Cairns. This also gave us an opportunity to purchase a second property to live in. Doing so incurred a $250,000 cost to our savings and additional ongoing costs of $5,000 annually for strata. However doing so also freed up our house for rental. Which we receive $2,000 per week or $100,000 annual in rent.
We have not included this additional rental income windfall in our savings goal as we simply see it as a windfall and used to replace the $2150,000 purchase of the Cairns property.
Given our previous home has now become an investment property, we are legally allowed to offset the cost of expenses against our income. The property with strata and management fees annual cost is approx $35,000 annually, so based on a current marginal tax rate of 37.5% these investment costs now becoming deductible, and we have been able to achieve $13,125 annually in tax savings.
In broader but more day to day ways we were able to slowly inch towards our savings goal by brokering a better terms with our following service providers
Bank: Saving 0.50% annual interest on a $500,000 loan $2,500 annual savings.
Credit cards: Choosing only one credit card with a complimentary holder has achieved savings of three annual fees or $1,200 annually.
Power: Change of providers and lower usage savings via more efficient bulbs and appliance usage achieved $100 monthly or $1000 annually.
Subscriptions dropped: Foxtel saving $660 annually as this is replaced with SBS online and movies via a smart TV.
Health: Like with power bills a change of providers we achieved savings achieved $1000 annually with same benefits and excluding some ancillaries we don’t require i.e. pregnancy, remedial massage etc.
Phone/Internet: Like with power bills a change of providers we achieved savings achieved $1000 annually now we get unlimited data and free calls to each other.
Total ongoing savings are $50,635 annually.
Note these savings are in addition to an increase of business $180,000 and $60,000 (net of costs from rent) personal income, annually. Meaning we are ahead by over $290,000 annually in savings excluding additional earnings (less personal income tax, business operating expenses and excluding other existing investment income)..
Most importantly these savings and growth in annual earnings is only the ticket to the game. The real prize and financial gold medal is attained by patiently maintaining the cadence of saving money, increasing earnings and building ones assets to the point of attaining ones financial independence.
As Einstein famously said about compound interest “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t pays it.”
This post was written by Peter Horsfield, as such they are his personal views.
Peter Horsfield in an Authorised Representative and Investsure Holdings Pty Ltd ABN 16 050 286 630 as trustee for Horsfield Family Trust ABN 55 609 068 513 is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523.