Podcast: 3 Things You Can Do To Prepare For Hard Financial Times | Ep. 244

Posted by Ed McKnight on 14/05/20
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Listen to the Show

Show Notes

What's Covered in the Show?

In this episode, we discuss 3 things you can do to prepare in case times get tough financially:

Build up a 'mojo' or emergency savings accounts. Initially set this up with $2,000. Then, when you can, build it up to 3 months worth of expenses. This will give you added confidence that you can weather financial storms, and allows you to take more risk Get revolving credit accounts in place. These will allow you to turn the equity in your home or property portfolio into cash when you need it Build a savings habit, and know exactly what it costs to run yourself and keep yourself alive. You need to know exactly how much you are saving each week, which will allow you to more quickly respond to your own, or others' needs.

We also mention our upcoming property investment webinar. These webinars happen every Tuesday, and you are more than welcome to pop-in, or register and receive the recording the following day.

Transcript

Transcript of the Podcast


Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host, Ed McKnight, and I'm Andrew Nicol, and today on the show, we're talking about what you can do or three things you can do to get yourself in a comfortable position in case bad stuff happens.

So look, we know that there is some bad stuff happening out there in the economy.There are companies that are making redundancies and people, some people are unfortunately losing their jobs or businesses, and we're going to talk about three different things you can do to prepare when the times are good for, unfortunately if things do go bad, and I'll start.

The first is I want to talk about what's called mojo. Now, this is a term that is used in the Barefoot Investor. That's a book we did a book review on, and actually that's been our number one highest ranking episode or most listened to episode that review on the Barefoot Investor.

Within that book, he talks about having a mojo account. Now, this is a, a buffer or a safety account where you're putting money in so that you can have a bit of mojo as you're walking around because you know that if something bad was to happen, you'd actually be okay.

And Scott went within his book, he actually says he's having two levels of mojo. So when you're just starting out, just save two grand and put two grand in a separate bank account so that if there are unexpected car bills or something happens, there's an unexpected expense, you'd be able to cover that.

Then after you've paid off all your other consumer debts, whether that's a Gem card or your credit cards, then he suggests saving up to three months of expenses. So three months, enough to cover three months worth of expenses. And actually I'm going to tell a story in a minute, once we get to the third tip where I've really been encouraged to save up that amount.

I don't currently have three months of expenses stocked away, but I tell you what, with coronavirus and some other things that are happening, it's, it's getting me very motivated to Andrew. What's the, what's the second tip there that you'd recommend.

Andrew Nicol: So number two is one that we use all the time with clients, and that's having a revolving credit facility in case of emergencies. So, just remember if you're one of those people who are uses a revolving credit to pay off their personal loan faster, this is over and above what I'm talking about here.

So, if you've got a revolving credit for your personal mortgage, normally that's overdrawn, and what you're doing is you're diligently paying that down at a faster rate, which does create a buffer. So that three months surplus, you could actually keep that in that revolving credit facility.

What I'm talking about today though, is a revolving credit, that's undrawn, so a facility that's available at any time, and you don't pay interest on that unless you use it, but just there in case of emergencies. Now, whilst no one wants to go into debt further, it is a better solution.

If you're going to be in a position where you're going to have to sell a property under desperation, because if you were in a position where all of a sudden you have to get rid of a rental property or get rid of your own house because you're not going to be able to meet your mortgage payments, you're never going to be able to get top dollar on that property because people are going to smell that desperation.

You're going to have to accept the first offer. If, on the other hand you've got a revolving credit facility to absorb some of those costs and you might be able to cover some of the, some of the mortgage payment yourself with, say you dropped from two incomes to one income and then just absorb part of that mortgage payment then at least it means that you've got some time to reassess your position and get yourself into a better place where are you going to be able to make those mortgage payments again.

Ed McKnight: And we should say as well that the strategies we're talking about are really about trying to solve a cashflow problem. So the idea that if you were to be made redundant, then obviously your salary stops and you'd have to live off your equity.

Now, of course, you can't set up a revolving credit if you don't have the equity in your home. But what we're kind of suggesting in this situation is, look, let's say you don't have your mojo set up, you don't have those savings. If you had a 20 K revolving credit, that was undrawn, then if you were unfortunately made redundant, you could live off that for a little bit.

Yes, you'd be going into more debt, but you could pay that off later, but that would help you solve the cashflow problem. So getting these set up before the bad times go bad because if you were to be made redundant, then there's no way of banks going to approve that revolving credit in that case.

There's a saying in the industry that often says that banks are willing to give you an umbrella while the sun's shining, but will take it away or, and won't give you it as soon as it starts raining.

And I think that's really clear in these times. And look, the third thing that I'd just recommend is creating a savings habit and getting into the habit of saving every week or however often you get paid.

That's for two reasons. One is that it decreases your expenses and you can save up for your mojo, and typically, if you know what you're saving, you know what you're spending as well, and you might have a figure in mind. I've got a figure in mind of what I know that I spend or what it costs to run Ed McKnight Inc. each week. And because of that, I've got a savings habit and I know how much I'm saving as well.

Now, this has become really important, not just for saving up for your mojo or paying down debt or whatever it happens to be doing. But I got a call the other day, for where somebody who's very close to me, said I've been made redundant and that's really unfortunate. And I didn't think this was going to happen for this person cause I thought they were in a relatively safe industry.

So I went for a run and as I like to do, and by the end of it, I called them back and I said, look, what's your mortgage. And they told me what their mortgage payments were, and I said, look, I can cover that for you if you want, if you need it. If you're unable to find a job, I know that the amount I'm saving each week is enough to pay that mortgage, so I'm happy to do that for you, not as a loan, just, you know, just cause it's a nice thing to do while you're doing that.

And that kind of really crystallised for me the importance of having that savings habit, which meant that I'm able to help this person out. And it really reminds me of what Di Foster, who was a guest on the show back in, I think episode 70 to 75 or something. And she said that she and Steve had made really good choices, but when it came to property they looked ahead and they wanted to make some better choices.

And so, I just recommend, if you don't have that savings habit already do what you can to try and get it, if you know, if possible, because that allows you to be in the position that if something bad happens, not necessarily to you, but to somebody else, that you're actually going to be in the position where you're able to help them out for a short time to help their cash flow issues while they are getting sorted.

And that's kind of really crystallised for me, a) why that I'm really glad that I've set myself up that way, and I'm lucky to be in that position, given that I'm young and don't have kids, so I don't have as high expenses as some other people, so I'm able to do that.

But also it's really made me quite motivated to save up that three months worth of savings rather than necessarily paying down my mortgage more aggressively and, and building up that equity.

Because I wouldn't want to necessarily be in that position where you're equity rich, but don't have the cash flow in order to be able to support that. So it's probably made me a little bit more balanced having been that. So those are the three things that they we'd say there.

Number one - save your emergency account, whether you call it a mojo, whether you call it whatever you call it, it doesn't really matter, but have that buffer there so that if something goes wrong, you're able to solve it.

Look if you can't do that, get your revolving credits in place against your existing equity so that you can draw on your existing equity to solve a cashflow problem.

So if you're able to do that, I'd recommend doing that basically now. And then number three is create a savings habit. And just have in mind, what does it cost to run your household each week, month, fortnight, whatever you get paid as well as how much can you save? I always think if you don't know how much you're saving each week, then you're probably saving nothing in that case because you don't really fully know.

You're probably spending it all. Anything else to add before we wrap it up Andrew?

Andrew Nicol: No, that's everything other than just to do this while you can, apply for any of these facilities, like a revolving credit, while you've got the income to support it because the bank doesn't give it to you afterwards.

What's that old saying, prepare for the worst and expect the best, and certainly that's the case in that situation.

Ed McKnight: Fantastic. Well, let's wrap it up there, but please don't forget to rate review and subscribe to the show, it really does help us get the message out to more people and hey, if you want to learn more about property with Andrew and I, why not come to our webinar this Tuesday at 7:00 PM we're going to drop a link to that in the show notes, or actually, why not check out our webinar library.

We've got one single web page on our website where you can go through and watch all the webinars. I actually got a message this morning as I was driving to work. Somebody said, what's the link to that Ed, I need to watch them or listen to them as I'm walking along the beach, so I'm going to drop them into the show notes as well.

But you can also just go to opespartners.co.nz and see that all there.

Thanks for listening to the Property Academy podcast. I'm your host, Ed McKnight and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.