How much is enough?
This is a question we often get asked by our clients, and it relates to any number of things, but mainly:
- How much is enough to start investing?
- How much is enough to buy a house?
- How much is enough for a safety net?
At the end of the day, there is no silver bullet for these questions; it depends on you and what you’re trying to achieve!
All three of these questions are linked, and they all refer to your budget. While it might sound simple, having a good budget that you stick to is the first step towards financial independence.
The discipline must be there in order to have cash put aside for emergencies, “fun” savings (such as holidays and hobbies), and finally, investment savings. Once you have your personal “must have” cashflow running smoothly, you can determine the correct amount you have to put to work (invest).
Selling investments at a time of volatility or market stress is when you lose money. Therefore, getting the budget right is incredibly important, otherwise Murphy’s Law will apply and when you need cash urgently, your only option will be to sell part of your investment – potentially at a loss.
When it comes to buying a house, we suggest that the minimum you want to have put aside is 20% to avoid Lenders Mortgage Insurance (LMI). LMI is a one-off cost that it capitalised (added) to the mortgage. Having any less than 20% means you will pay LMI, plus increased interest repayments. Remember, interest money on your main residence IS dead money – so is LMI as it protects the lender, not you!
As we have demonstrated in previous blog posts (see: But Rent Money is Dead Money!), while rent money is dead money, so is interest. So, building a sound deposit while still renting is in your best interest in the long term.
Your safety net depends on your ongoing expenses and dependants. If we take Tristan for example, he has no mortgage (yes, we walk the walk, not just talk the talk!) and his only dependant is his 6-month-old budgie. His safety net is far smaller than that of a 40-year-old who may have a mortgage, 3 young children and stay at home wife.
We recommend working out 3 months’ worth of bills, and having these funds aside for a rainy day. This number does depend on your income protection insurance and the stability of your work however.
To assist you in planning your budgets, please find a download at the bottom of this blog post with a link to our budgeting spreadsheet.
If you would like to discuss any of these points in more detail, please contact our office on 07 3260 7700.
Brisbane Money Management (BMM) is a financial planning company with offices in both Indooroopilly and Nundah.