4 money mistakes I made so you don’t have to
Guest post from Vincent Turner
From investing in an almond farm in Adelaide to spending too much on an (unseen) apartment in Queensland, I’ve made my fair share of mistakes with money. As the founder of online mortgage broker uno Home Loans, I now take great pride in helping other Australians save money on their mortgages. Here are four pieces of advice around money, based on some mistakes I could have avoided.
1. Be wary of investing in anything claiming to be ‘tax effective’
In my experience, tax effective is code for, ‘It’s going to lose some money but you’ll be able to deduct the tax’. The almond farm had very good tax deductions early on and I didn’t really understand the impact of that. What that meant was I was buying an asset that was effectively worth nothing at the point I bought it, but I was paying a lot for. And I was deriving a loss as a result.
Ultimately, the expectation was that the asset would start to become worth more but it didn’t. It was growing poorly. What I should have been doing is buying an asset that appreciated, not looking for a tax deduction. In hindsight, I should have bought property. That’s not to say, don’t do anything in a tax effective way. But, when you’re thinking of investing your money, invest in things that make money as opposed to trying to avoid tax.
2. Don’t buy property unless you’ve run the numbers and understood them
When I bought my property in Queensland, I thought, ‘It’s in a good spot, there’s an airport nearby but it’s not on the flight path’: fundamentally logical ideas. But I never ran the numbers on the property. What will it cost? What will the rent be? What will the purchase costs be? What does it need to appreciate? What if interest rates go up? When will this thing make money? I didn’t properly investigate it.
You need to have crunched the numbers and understand if this property is going to provide you with a return (income and/or capital) or not. I would now build an excel model. There are calculators online, but a calculator is only good if you’re knowledgeable about what to put into it. A good adviser, like the ones we have working at uno, can do that for you.
3. If you can’t afford principal and interest on your property – now or ever – you can’t afford to buy
With that same Queensland property, I sustained the ownership of the property by paying interest on it and I masked the fact that I actually couldn’t afford to ultimately pay down its debt. I didn’t have the cash flow to sustain it. The bank doesn’t want you to be interest only forever; eventually, they want you to pay it off so they can get their money back. But more than that, when you only pay the interest, it’s about two-thirds of the cost of payment. The principal only increases. You ultimately do better by owning things outright and not having to pay any rent to the bank. When you run the numbers, you should do it using principal and interest. If you can’t afford principal and interest, you can’t afford the property, so don’t buy it. It’s high stress and high risk and its standing too close to the wind.
4. Don’t confuse disposable income with financial competency
I had the good fortune of being on a reasonable salary in my early twenties. I had no mortgage, no children, no school fees. I had no debt to pay off. I literally had nothing other than my rent to pay. I never experienced a lack of money and, as a result, I never developed good financial habits. It took moving to the US and living off around $18,000 a year in one of the most expensive cities in the world to actually learn how to manage my money.
Ironically, I moved to San Francisco to start a company called Planwise! When people come out of university and start earning good money, they’re often getting taxis everywhere and getting dry cleaners to wash their clothes and eating out four times a week … if they’re earning good money they won’t notice that because they pay their rent and energy bills. But they’re kidding themselves if they think they’re developing good financial habits. You develop good financial habits either through parents who force you to do it or when circumstance forces you to do it. I was terrible with money but I didn’t know it because I was earning enough money to not be impacted by it.
It takes a few minutes to stay on top of what you’re spending every week because there are countless apps around now that make it easy for you (my favourite is frollo.us). You have no excuse now not to be better with money day-to-day; it only takes a matter of minutes a few times a week. It also only takes a few minutes to see if you could be on a better mortgage with uno. So, if you have one of those, I’m sure we can help you there too.
Vincent Turner is the Founder and Chief Innovation Officer at uno Home Loans, the online mortgage broker. Looking for a new home loan? What used to take days with banks and brokers can how be done in less than 10 minutes – from your laptop or mobile phone. Visit www.unohomeloans.com.au
It’s important to note that the information we give here is general in nature – no matter how helpful or relatable you find our articles. Even if it seems like we’re writing about you, it’s not personal or financial advice. That’s why you should always ask a professional before making any life-changing decisions.