Author: Don Crellin, Managing Director, Resolve Finance.
If you are looking to purchase an investment property, it is important to know exactly what financial commitments you can comfortably and realistically meet each month, without placing yourself in mortgage stress. The easiest way to set realistic targets is to compile a detailed budget and track it for a couple of months to ensure it is realistic. The easy job is setting the budget, the hard task is sticking to it but if you succeed, you are on the right path to successfully managing your money.
Here are some useful tips to help you prepare a personal budget towards Property Investment:
1. Find or develop an easy budget template
The first step in developing your budget is finding an easy budget template which you can use to input all your income and expenses. You may wish to set up your own in Excel or a similar computing program, or you can save yourself time and hassle by downloading any of the free templates and programs available on the internet. Alternatively, if you have an iPhone or mobile device, you can download an App (free or for a small expense) which means you can easily track all your expenses on the go!
2. Decide how to monitor your expenses
When you set up your budget, you need to establish a realistic picture of your monthly income and expenses. You can do this by sorting through your financial records and inputting all the data, or you may wish to input the information over the course of a month to get an accurate indication. If you choose the second option, just don’t forget to factor in any quarterly and annual expenses which don’t pop up each month such as council rates, insurances and licence registrations.
3. Group your spend and sort out fixed and variable expenses
Depending on which budget template you use, try and group all your expenses into similar categories (such as household, entertainment, travel or medical) plus track which expenses are fixed or variable. For example, items such as your income, weekly rent, mortgage repayments and gym memberships are example of fixed costs where as your entertainment costs and weekly food bill will be variable. It is important to remember if you spend more in one area than what you have budgeted, you will need to cut back in another area.
4. Compare income and expenses
This is the simplest way to find out if your budget is on track. If you plug in all the information and your expenses exceed your income, you need to seriously revisit your finances. It is also important to remember to include any money you have owing on your credit cards. Many people forget this item and when they blow their monthly budget the credit card comes to the rescue. This is a risky solution that will only get you in more trouble in the long run!
5. Add in your investment expenses
Once you are happy with your current budget, add in a separate section to forecast how your budget will be affected if you purchase an investment property. If you are unsure of what expenses you need to factor in, speak to your Investor Assist Property Consultant who will happily provide you with a realistic indication of all the items you need to include upfront plus on an ongoing basis.
6. Review your budget
When you have completed your budget, review the entire spreadsheet to make sure is it REALISTIC and your funds are being fairly distributed across all areas and you haven’t forgotten anything. If you are spending a surprisingly large amount of money on travel or entertainment, you might need to reassess these aspects of your lifestyle in the short term if you want to save money or focus on developing your investment portfolio. It is all about balance and a detailed review will give you a good overall picture of your financial position. This should be carried out monthly, quarterly and annually.
7. Plan for the worst case scenario
Nobody likes to focus on the negative but you also need to be realistic. If a downturn in the property market, a slight increase in interest rates or a decrease in income is going to throw your budget into a tailspin then you probably haven’t left enough ‘breathing room’ in your budget. Plan for any potential changes to your scenario, such as your family decreasing to a single salary if you decide to have children, and make sure your budget has the flexibility to move without causing you too much stress and anguish. If your budget can adapt with you, it is probably robust and realistic enough to withstand any unexpected changes.
8. Put your budget to the test
Once your detailed budget is in place, don’t race ahead and purchase your investment property without putting it to the test first! Track your budget against ‘actuals’ for a minimum three month period and tweak and adjust it accordingly. You might be surprised to find you save or spend more than you thought!
9. Stick to it!
How many of us have spent hours putting a budget together, only to forget all about it within the first month? Don’t let your hard work go to waste so persevere and make it work to your advantage! Using an App or other mobile template which enables you to input information throughout the day will assist by making it less of an arduous task to update your budget at the end of each month! Find what works best for you.
10. Be sensible with additional savings
If you are ahead of your budget and have money left in your pocket at the end of the month, this doesn’t mean you should blow it on toys, travel or entertainment! Of course you can, but give careful consideration to the benefits of putting the extra money back into your mortgage or paying off any credit cards or bills. This will decrease your debt and help you get ahead. It will also give you a bigger buffer and more breathing space if your circumstances suddenly change and you still need to meet your financial obligations. It may sound boring and sensible but you will thank yourself in the long term!
If you are interested in this article, check out our EXTRA SAVINGS CALCULATOR under the resources section on our website.
For further information contact Resolve Finance or your accountant.
DISCLAIMER:This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances.