7 tips for investing on a small income

A corollary of Parkinson’s Law states “expenditures rise to meet income”.

Have you ever been a victim of this law?

You have if every raise you get is quickly swallowed up in your spending. Soon you reach the point where you can’t imagine ever living on less...even though you did once!

That’s why keeping a budget is so paramount to your success. Yes, those individuals with larger incomes should budget too. However, as someone with less cash at your disposal you’ve got to be really creative and disciplined to make the most of every dollar that comes your way.

Don’t let anyone tell you (including yourself) that you don’t make enough money to invest.

You can invest on a small income. Here’s how to get started:

1. To begin with, exercise patience. It will take time to build up your nest egg. It can be done with persistent, sustained effort. Remember that investing is a long-term strategy - no matter what size your income.

2. Establish a pattern of saving weekly. Whether it’s $25, $50 or $500, consistently put money into an interest bearing savings account.

Lenders will want to see that you’re a steady saver.

3. Start small by buying an investment well within your budget. However, don’t buy ONLY because you can afford it. You’ve got to have a strategy first. In other words, what are you going to do with the property?

4. Combine resources with other investors - preferably investors who have experience with both property investing and joint venture schemes - and buy through a joint venture.

The following factors should be part of the agreement:
● A sinking fund to cover vacancies, repairs and strata fees.
● Who is responsible for what.
● How insurances, taxes and depreciation will be managed.
● How long the property will be held and what will be done with it, including percentages of ownership.
● What to do if someone wants to leave the JV agreement.
● How it will be managed - property manager or one of the partners.
Part ownership is much better than NO ownership at all!

5. If you currently own a home, you can tap into your equity to obtain the capital you need to buy an investment property.

As cash flow will be a concern, don’t opt for negatively geared properties. Find something that will be cash flow positive from the start - before taxes.

6. Unless you are able to put 20 per cent down you’ll be required to carry LMI (lender’s mortgage insurance), which can significantly add to your repayment costs. Be sure to include these costs when calculating what you can afford.

7. Buy an off-the-plan purchase, bought at the early construction stage, using special considerations such as a first homeowner grant. Obviously you’ll have to take possession as a homeowner but after a period of time you can turn it into an investment property and rent or buy another property.

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