13 Apr The countless budgeting mistakes made by investors
There are countless budgeting mistakes made by investors all over the world but they can be summarized as underestimating expenses, overestimating income and failing to plan for unexpected costs. But there are long-term errors investors can make in their existing financial plan and Helen Collier-Kogtevs reveals what they are.
Kevin: My guest this time is Helen Collier-Kogtevs from RealWealthaAstralia.com.au.
You wrote an interesting article that I wanted to talk to you about, Helen, and that was about the budgeting errors that investors should avoid or quite commonly make. What are those errors?
Helen: There are quite a few, Kevin. Firstly to start off with, it’s preparing a budget without any real goals in mind. There’s a lot of conversation around “We must be doing some budgeting, we must look after our pennies, we must save for the future,” but there is no real structure or framework in place for people to actually implement.
With that, sure, you can go online and you can download an app and do all that kind of thing, but people are like, “Yeah, yeah, I’m doing a budget because I feel like I need to and I should be managing my pennies better,” but they’re not factoring in goals. What Is the purpose of it? What are you trying to achieve? What is the outcome? What is the desire you’re wanting?
Kevin: Yes. You make a very good point there, and that is what I call the “why” – “Why am I doing this? What is the outcome that I want?” That’s going to help you make that plan, Helen, isn’t it?
Helen: Exactly right, Kevin.
Kevin: You mentioned there about budgeting, but probably budgeting without enough understanding about what the real costs are.
Helen: Yes. It’s one of the areas people don’t realize, and what I want to share from personal experience is that the very first property we ever bought… And I know this is a nincompoop thing to do, but you know what, Kevin, back in the days I had no idea what stamp duty was. So when calculating out a deposit, I thought, “Yes, we’re going to engage a solicitor so we’re going to need some money for that,” but when it came to it, oh my gosh, we got this $15,000 bill for stamp duty, and I didn’t realize that or I didn’t anticipate that.
For the newbie investors, understanding every cost is important. For those investors who have been in the market for a while and understand the basics, some of the costs they underestimate or don’t even consider are things like trips to go and view the property – if you’re going to jump on the plane if the property happens to be interstate, whether you get in the car and drive to view it – or what about the data reports that you might be buying? Some of those aren’t cheap. It’s those sorts of costs that people need to factor in and take into account
Kevin: When it comes to budgeting, too, especially for some new investors, I guess, they don’t know what they don’t know – all the more reason to cast that net wide and get some experts involved, isn’t it?
Helen: Exactly right, Kevin. I never buy anything really without consulting my accountant and my finance broker first – even with something like buying a car. I’m in the process of looking at buying a car; the first call I made was to the accountant to say, “How do I structure this? What’s the best way as far as asset protection goes? What’s the best structure for buying it? Do I put it under finance, or do I buy it with cash, etc?” Then I went straight to my broker and said, “Look, I want to buy this car. This is roughly how much I want to spend. What’s the impact on my borrowing power for when I want to buy my next investment property?”
Consulting the experts in all areas of your life when it comes to money really does make the difference between being able to get into that next deal and potentially not.
Kevin: The final point that you made, and it follows on from what you’ve just been talking about there, Helen, is how we tend not to take some insurance, I guess, by way of a buffer. Explain to me about the buffer and how big should it be?
Helen: Great question, Kevin. With a buffer, it’s that bucket of money that you keep aside that you don’t touch. Now that bucket of money can be cash in a savings account, it could be equity in your home or in an offset or redraw account, but it’s money you have access to that you keep aside for a rainy day.
A buffer is not the, “Hey, I’ve been saving for a couple of months. I have $5000 in the bank and – oh, upsy-daisy – I want to go on a holiday, and I think I’ll just take it out of that account.” That’s not a buffer. The buffer is something you just keep aside purely for your investing and to protect you should and if life gets in the way.
An example of how much a buffer should be? Some investors say to me, “Helen, $10,000 is plenty.” That’s okay if that’s where their peace of mind is at and if $10,000 set aside gives them that sleep factor, great. But then there are other investors I’ve spoken to who say to me, “Helen, $10,000 doesn’t cut it. It needs to be more. I want to take a more conservative approach.”
I have got a rough calculation that I share with people and it goes like this. Annual expenses: you look at your total annual expenses for that property minus the rent, and whatever the balance is, you multiply it by 12 months.
For example, if your expenses are $25,000 and the rent is $20,000, therefore you have a balance of $5000 and you multiply that out by 12 months and that gives you $60,000 as a buffer.
Then some investors will keep that $60,000 aside because that gives them the sleep factor.
Kevin: Gee, that’s a really good formula there. I guess the other two points, too, that you make in your article are that a budget is flexible – you need to be adaptive – and also to redo your budget when you reach your goals.
Helen: Absolutely, Kevin. We call it “rinse and repeat.” When you’ve actually achieved the goal of, maybe you’re purchasing that property a set time, then you have to redo your budget. You have to see what the impact that property is having on your disposable income and on your day-to-day cash flow or month-to-month cash flow.
If it’s drawing more money out of your budget, then you need to reassess so that you still have your buffer maintained and you still have your lifestyle, you’re not living off baked beans while you’re going through this journey of creating wealth through property.
You’re just taking stock. It’s doing that constant stock-take once you’ve achieved your goal and then resetting yourself, where you go, “Okay, great. I’ve bought that property. It’s only costing me $50 a week. The budget can handle it. The buffer is in place. I still have $150 a week in savings. So I’m ready to go now and do another deal.”
Tat way, when you’re looking at purchasing the next property you are crunching the numbers, and you already have a really good idea as to what it’s going to cost you and that your budget can sustain it.
There are investors who sometimes go and buy that second property without reviewing the budget, and then they realize, “Oh, my gosh,” after they’ve done the deal that their budget is really tight and they’re scrambling to find more cash flow.
Kevin: Helen Collier-Kogtevs, my guest from RealWealthAustralia.com.au.
Helen, it’s always great talking to you. You make so much sense. Thank you very much for your time.
Helen: Thanks, Kevin.