Savings and Income
Ok, so now the budget is made, Kiwisaver is set up and some money is being saved up. Your savings may be $10 a week or $1000 a week, the amount does not matter, but how you are going to make it work for you does.
Let’s first look at the two types of income: passive and active.
Active income is what you earn as your weekly or fortnightly pay. It’s the income that one has to actually do some work to earn and can be in the terms of wages or salary and one pays income tax on it.
Passive income is what one earns without doing a job but through investments like shares, bonds, rental income and bank deposits. GST or withholding tax is charged depending on the investment. Passive income works for you 24hours a day, 7 days a week, 365 days a year and does not take a break or sleep.
Personally, I would like to semi-retire by the time I am 40 and try to enjoy the finer things in life before I am too old to appreciate them. But for many people like me doing a middle class job it would be difficult to do so. How many of you can actually survive on half of what you earn today? What if you become sick? Inflation? So many things can go wrong. Oh no, its too scary to even semi-retire that early at 40. It is simply not possible, right? Depends
Depends if you are willing to save a portion of your active income to invest to earn passive income.
Lets say, 3 people have saved $1000 and want to keep it for 10years.
Person A puts it under their mattress for 10 years. After 10years person A would still have $1000. But where $1000 before would have bought a nice car, after 10years it can only buy the tyres.
Person B puts it in a bank at a fixed rate of 5%annum for 10years. Withholding tax would be charged on the interest earned which most banks automatically subtract from the interest earned. Say after 1 year, interest earned is $50 and after tax its $36. Than take out bank fees and Person B is left with $20 interest earned. if reinvested, after 10 years Person B may have $1250 altogether. That is 2.5%return yearly on the $1000 investment. According to past articles on interest.co.nz, inflation has been rising in NZ over 3%yearly. Just look at the housing market and rents.
Person C invested in a mixed fund consisting of shares, bonds, property and cash deposits. Some years shares performed well, some years property boomed. On an average, the returns were lets say 7% yearly. After tax, the return would be $50/yr minus fees $40/yr. but share prices itself would have increased so if he bought 1000 shares at a dollar each and after 10 years those shares now were $3 a share, Person C now has tripled his money and more than outpaced inflation. But the risk here is higher and shares do go up and down which is why spreading them out would be a better way to go.
Over the past 6 years, I have invested in property and shares and have seen great returns. House no 1 bought in 2009 earns $470 fortnight after tax, rates and insurance and is on track to be paid off by the time I turn 40. House no 2 I bought this year earns $300 fortnight after tax, rates and insurance. If you read back to my current personal budget highlighted in an earlier post, $770 would cover my fortnightly budget . And with inflation costs rising, rents can also increase. But there will be maintenance and repair costs plus the house may not be tenanted all the time. Therefore, I also invest in shares.
As a result of my lean budget, being single, a workaholic and loving the outdoors and sports, I have been only requiring a place to store and sleep and thus flatting which is cheap. Therefore I have been on average saving $15-20000 a year part of which I invest in shares and the rest save for buying next property. It actually would have been $26,000/yr but there are things like clothes, shoes, small holidays and sometimes a party or two which ate into those savings. Oh and I also celebrated my 30th birthday in style with weeklong hotel stays with lots of pampering. There were also some sad events and some unexpected ones.
It would be good to break your savings down into groups such as emergency 10%, travel/holiday 20%, personal emergeny 10% and savings 60%.
Emergency for that one of sudden events such as death in family, natural disater, etc. For Holiday or travel saving say $100/fortnight would give $2600 at the end of the year. Personal emergency constitutes clothes for that big event, car maintenance , etc. Savings can be invested knowing that you are covered for any other emergencies.
As of today, I have liquidated most of my shares, partially because I needed money to fund buying a new investment property and partially because i think we are due for a downturn. Now remember, share prices change all the time, some may go up while others go down. Dividends are more stable. For the past year, I earned a total of $4000 in dividends before tax. My aim in 2015 was to make my total passive income $20,000 after tax in the next 10 years. In two years, I have surpassed that. So new goal, increase my passive income by $5000 a year for the next 8 years as well as pay off any debt.
Partial retirement at 40 is looking good for me at present…..