Investing on a low income. Impossible, yes? No? Maybe? No! Never say never. There are people out there earning far beyond the average yearly wage but are up to their ears in debt and have no savings to lean on. Why? They can’t save. If you want to invest on a long income you need to learn how to save.
Investing on a low income: locate, list and learn.
Nothing gets an investor’s blood pumping like a three-part financial checklist all starting with the same letter. So here is a three-part financial breakdown to help you start saving. All starting with the letter of the day: L.
- Locate. Before stepping foot in the bank. Before placing a finger on your favourite real estate app in search of properties. Before putting ‘Property Investor’ on your LinkedIn profile, you need to locate your financial position and lock it down.
Go over and list your assets and finances. Ascertain what financial position you are starting from as an investor. Make sure to also make note of where you plan or expect to be within 3-5 years and then 10 years in relation to your income.
- List. List all your incomings and then your outgoings. In other words, construct yourself a budget as it stands. There are plenty of online budget planners but consider using the Australian government’s ASIC budget planner as a starting point. With an idea of how much those daily coffees or nights out are affecting your weekly, monthly and yearly budget, you will have a much clearer (and sobering) idea of what is influencing your budget. With all the numbers in a nice, neat spreadsheet you will inevitably do the following:
- Learn. With a goal in mind, a minimum deposit you wish to save towards, you can now amend your budget. Learn from the status of your incomings vs. outgoings and your financial worth in regards to your assets. See what happens when you reduce particular outgoings. This includes the small things, like coffees, or the larger expenses, like amendable insurance policies that may not suit your lifestyle. Use our Savings Tool to help you save and check out our article on using technology to help you save.
More than anything, if the savings you stand to make are worthwhile, stick to these changes. Make it as automatic and easy for you to make these changes to your outgoings and to the transferral of money to your account.
Helpful ways to help yourself
Following a look at your finances, you will be in a much healthier position when investing on a low income. However, consider the following extra measures you can take to help secure financing and move into the property ladder.
- Reduce your credit limit. Even if you regularly pay your credit card bills, if you have happily agreed to increase your credit limit over the years to where it is just way beyond what you could ever need, consider limiting it. Regularly increasing your limit can actually have an effect on your credit score, as it suggests regular credit activity. On top of looking at your credit score, a lender may see a high credit limit as a possible liability that you may need to pay off, regardless of whether you ever intend to borrow that much money on the card. Reducing your limit can take up to a week so be prepared for this change before meeting with financiers.
- Lenders Mortgage Insurance. Investing on a low income can be made easier by taking out LMI. This is an insurance policy for your lender, not you. While you can secure a mortgage with only 5% of the deposit through taking out LMI, remember that if you do default on the loan, your lender is insured and you may remain liable for any payments to the third party insurer.
- Interest-only loan. Having a strong understanding of your budget first, you may consider taking out an interest-only loan. Lenders are less likely to provide this option to low-income earners, as you will only be paying money on the interest of the loan, rather than making any dent on the actual loan. However, if you can assure growth in your incomings and demonstrate healthy savings practices in the past, you may be able to use this option.
- Six-year-rule. Not many young investors are aware that if you occupy your investment for a year and then keep it as your main residence, while either renting elsewhere or living with parents, you are free from capital gains tax if you sell your investment within six years of purchase.
- Co-own. Consider investing with friends or a partner. As the old idiom goes, it is better to earn 50% of something than 100% of nothing. Check out our article on investing with friends to avoid any of the pitfalls.