Welcome to Episode 3 of The Inspire & Inform Show where it is our mission to help you to build a better future together. This week Andrew & Colin upack Andrew’s mindset and strategy around money and cashflow management within his portfolio which he affectionatly calls his “wealth machine”. He will share how he uses this strategy to simplify his decision making and automate his progression towards his long term goals and to ‘sleep well at night’ regardless of the challenges presented along the journey.
Please see below for the full transcript of this video
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Good evening, everybody. Welcome to Inspire and Inform series on the 17th of June 2020. My name is Colin Lee. I’m the founder and CEO of Inspire Realty. Joining me tonight I have Andrew Koleda, who’s one of our founding team members. He’s also one of our senior strategists and a mentor. I like to call them that. Andrew has helped a number of clients, Andrew, to create wealth through property. In fact, with Andrew tonight, we’re going to be hearing a story of one of his clients, that he’s helped to put together a bit of a structure in terms of his cash flow, and really helped him to get into his investment property portfolio. So I’m, I’m personally quite excited to hear about this client of Andrews and also I wanted to just share that Andrew is really the real deal. He’s a practitioner of what he teaches, and preaches. In fact, he’s recently been well not that recent A little while ago, Andrew had been featured on the smart property investment podcast. So if you want to hear a little bit more of Andrew, you can certainly go to our website on the page of Andrew and you can click on that link to listen to his podcast. But I want to share that Andrew will be covering a couple of things and then I will, you know, chime in with a couple of my thoughts about financial independence, what it actually means what it means to me, you know, and how you can benefit from understanding the philosophy of financial independence, while creating wealth. Andrew will be covering why cash flow system is important. And really just going through some basic mechanics on how to structure your flow of your cash flow. So, Andrew, I’d love for you to take it away and go through your your little tips and, and strategies. So yeah.
Okay, thanks. Thanks. Thanks very much, Colin. Yeah, as Colin mentioned, I wanted to share this evening A little bit of a story about a client of mine and some of the tips that I gave him around cash flow management. But what what Collin didn’t really allude to in that introduction was, I guess this is the exact or frame, what the exact framework that I actually personally use myself to manage my own cash flow. So when I was advising this client, which I’ll share in a little bit, I was actually sharing from my own personal experience. And the framework I wanted to share tonight is what I actually use myself in order to gain a bit of certainty around my cash flow management within my portfolio. And the way that I’ve set it up, really, it’s not prescriptive. It’s not something that hey, you have to do step 1234. But it’s more of a way of thinking about how money flows through your own personal finances and trying to shift it to thinking a little bit more like a like a business. In order to be able to get a little bit more clarity around how you’re going to get from where you’re at to where you need to be, but also to give some security around, I guess, handling or tackling some of the roadblocks and challenges that you’re going to face along the way. And you know, obviously very topical at the moment Coronavirus is and COVID-19. And the situation there. And I was just reflecting a little bit earlier this week that this system that I’ve set in place that I can just simply follow the rules, takes a lot of stress out of my cash flow management through times like this, and gives me a little bit of security of having a buffer in place in order to be able to manage if I was to lose a tenant or whatever it may be. So that’s what I want to share tonight. So I might just flick up the the screen here. I affectionately call this system that I use and this is just internal The wealth machine.
And the reason I kind of coined it as that topic for that title myself is that I think about my property investment portfolio both from a capital growth and a cash flow perspective. So tonight we’re going to focus on the cash flow side of things, but a strong set of a structure or a system in place, and I think of it like a machine. And this way, I’ve been able to convince myself and and, and, and feel comfortable within myself, if I follow the steps that I set out for myself. Ultimately, I’ll end up at my goal, which is based on wealth. So that’s why I think of it like a machine. I just keep plugging into the machine and the machine will tell me when it’s time to buy the next one when it’s time to consolidate and just be a little bit have a little bit more peace of mind or sleep at night.
Andrew, I will just pause you ther for you there,
You mentioned a number of times that wealth is a mindset and I like how you connected wealth with machine. I guess if you don’t mind just elaborating what what do you mean by wealth? just for the benefit of some some of our audience that may not have it just just so that we’re on the same page with you? What’s your deininition of wealth?
Sure. So when I have set out and when I talk to clients, but even for myself, wealth, wealth to me is about freedom and choice. So when I, when I set out my planning for my own portfolio, I actually, it’s quite interesting. I separated it out from away from property. And I set myself an income target. So I set myself a goal of Hey, I want to be able to earn in X amount of time, and it’s probably a deeper topic that we can delve into in another another session, but X amount X amount of income in X amount of time, and then what I did is I and that was obviously put in relative to today’s dollars or today’s spending power had to adjust for inflation.
But I worked out a percentage of return that I felt comfortable getting off my net worth. And then I set my complete focus on wealth to equal net worth, I was all about at this stage of my portfolio growth, trying to aim towards a certain net worth, which I knew would be able to deliver me the cash flow off it. That’s why it’s the void of property property was the vehicle that I was looking to use to build up my net worth. So when I think about wealth, I think about achieving a certain level of net worth for myself, and that will give me and then why I link it to the freedom side of things that will give me the freedom to choose a certain lifestyle, which I’m sure at the time that I achieve my wealth goal may be very different to the lifestyle that I want to live today.
Yeah, so about freedom and choice.
Yeah, that’s what that’s what it is. To me. I’m curious what what would be your answer to that question? What does wealth mean to you?
Yeah, it’s a good question. I mean, I’m not going to be oiginal. And take a leaf out of a book that I love reading. And it’s actually from not sure if you can see this, but it’s Jim Rohn’s the keys to success. Just for those that don’t know Jim Rohn. Jim Rohn is actually a teacher. And he has taught one of my mentors that I worked very closely with at one point, Anthony Robbins. And subsequently, Jim Rohn has been quoted by a lot of, you know, speakers, and wealth coaches, so to say as well. And there is a chapter in here, there’s probably no there’s six chapters, and it’s funny the last chapter in his book is financial independence. And he defines it very clearly says that financial independence is the ability to live from the income of your own resources. So from a property perspective, for me, it is about being able to have the freedom to live the life that I want to live. And that is really from being able to live off what I call passive income. So there’s two types of income. One is active income, which is what I’m doing. But I also have a bunch of assets that’s earning the passive income, a couple of my properties have already switched over to the passive income state. So what that means is I don’t have to do anything in order for me to be generating an income out of the property. So the idea for me is that all my assets, which is predominantly properties at the moment, upon my retirement, would start to generate me passive income with minimal effort, so that I can have the freedom to enjoy life, do a lot more teaching for me personally, I love traveling, unfortunately, I can’t do a lot of travel right now, but I’d love to allocate a lot of that resource towards traveling and enjoying the beauty of the world and really, you know, going out there to see see God’s creation, so to say. So to me, it’s a bit of an outcome. Yeah.
Awesome. Thanks for that. So just just getting back, I wanted to share with you a little bit about the story of how I came out with this cash flow system. And that’s a story of a client of mine, Jason Fineberg. He’s also a personal friend. So that’s Jason in the middle there and I’m on the right think as another friend of ours and we had a day at the races. So that’s the the most recent photo I can find if all of us together. So Jason’s a sales manager in Western Sydney. To be honest, he has a fairly average income, nothing exorbitant, so not in the hundreds of thousands of dollars a year. And I also wanted to share that because I wanted to impress upon everyone that’s watching that, you know, property investments not just purely for people on high incomes. So Jason, to his credit now owns two investment properties. And he didn’t really have a cash flow management system in place. And I remember when we were sitting there and we were talking about his purchasing his second investment property, he was looking a little bit concerned, right, just before he was about to sign the contract for this particular property. And just completely off the cuff, we got into the conversation around cash flow management. And what I discovered in that conversation was, he didn’t really have a good concept about how he was going to be able to hold that property over the long term, and also how to really separate out his personal money and his investment money in terms of cash flow. And he shared with me that he was, you know, a little bit not so confident about knowing how much money he actually had to spend and what he had to save for his investment, and he was just a little bit confused. So the system we’re going to share with you is exactly the same that I personally use, and also what I shared with Jason that time. So, you know, I guess a couple of precursors to this, how I came about it. We know as long term property investors that successful property investment is about time in the market rather than timeing the market. So we always have a long term mindset and have that in order to be able to hold our properties over the long term through whatever challenges that are thrown along the way, we need to have a good strong cash flow management system and knowing your numbers, which I know you’re very strong about Colin is very critical to your ability to be able to hold those properties over the long term. And as I shared in the introduction, you know, creating a personal system that’s unique to you this is no cookie cutter method to do this, you need to find a system that works for you. And so the idea of this is to share the framework for people to be able to come up with their own system that works for them. But it removes the stress in the decision making process. It really knows where it enables you to know where you’re at, at a particular moment in time, to be able to make decisions whether to bunker down whether to it’s time to start thinking about your next purchase or where you are in the cycle. And having rules about it and setting those rules out in advance. I know no one really likes rules. But for me, very simple rules and frameworks helps me to just make decisions easily and tackle things when I’m faced with uncertainty. And I’ve really approached my property investment and my cash flow as if it’s a business because I sat back and thought about this and I said, Hey, I’m going to become a multi million dollar property investor, this is the biggest business very likely that I’m ever going to run in my lifetime. And I need to treat my investment journey with as much due diligence as I would running a multi million dollar business.
And I think that’s very much that mindset. And again, I call it my wealth machine. So that’s a couple of precursors. And and I guess a lot of the stuff that I’m going to cover is, I guess, requires a little bit of, I guess, pre knowledge. And I think some of these topics, I’ll cover them very quickly, but I think we’ll potentially unpack some of these topics in light later episodes, because we’ll need to go a little bit deeper than the time that we have tonight. But I wanted to cover off on the three different types of debt that’s out there. So I call it good medium and bad debt. So good debt in my book is something that number one income producing and number two appreciates over time. So, in terms of property investment, that’s obviously an investment property. So, any debt that I have against that investment property, I will consider it good debt. Because additionally by meeting that definition of income producing, it is a tax deductible debt
Medium debt I would I would classify as something that goes up in value over the long term that may not be income producing. So medium debt, I would consider your principal place of residence in terms of the properties that you own
And then bad debt is something that is not income producing and depreciates over time. So that could be debt against the holiday, debt against the car, debt against any other type of purchase. That is not income producing and doesn’t go up in value. So that’s kind of how I classify good medium and bad debt.
Andrew you mentioned with your good debt and medium debt, they’re both property. So one is your principal place of residence, and the other ones an investment property which generates your cash flow and also growth over time. Just want to note that one of the first few books that I’ve read about investing is from Rich Dad, Poor Dad, Robert Kiyosaki. It makes a really good point. He said that an asset is really an income generating investment. That that’s why he didn’t you know, he says, your principal place of residence is not an asset because it’s not generating you income. In fact, it’s costing you money. So it’s interesting that you’ve put that in the category of medium debt.
It’s very much in line with Robert Kiyosaki’s thinking on that. I’ve just turned it away from the assets and looked at the liability side all the debt side of that equation.
Yeah, yeah, that’s good.
And the other The other concept that I wanted to briefly introduce is to this notion and it gets its heavily used in the, in the business world, but not so much in the personal finance world. And that is the concept of fixed costs and variable costs. So another way to think about that, in turn, and maybe it’s a little bit easier and thinking about it this way in personal finance, is around discretionary and non discretionary spending. Yeah, so I would you know, in my own cash flow management, I think about things like so I’m a I’m a rent-vester and my rent would be a non discretionary spend, I need to spend that for me shopping, you know, for food is a is a, you know, a non discretionary spend, I need to eat, things like my phone bill, water bill, whatever it may be, that I had to spend month on month so just non discretionary spending would be my fixed cost. Even if I stopped everything, I would still have these costs.
My variable cost or my discretionary spend, would be going out to dinner Uber Eats anything that I can do without. And it’s an important distinction when when when we get into the cash flow management system that I’m going to share with you today.
And a small part of knowing your numbers, and I’m sure we’ll share something about this at a later stage is really having a good understanding if you’re already a property investor is knowing what your portfolio holding costs are both pre and post tax, and part of a one of the free resources on our websites. Actually, I unpack that in quite a lengthy video where I share one of our tools that we use for our clients to be able to work out those exact numbers.
And yeah, as I’ve already mentioned, What I’m about to go through is designed to be not designed to be prescriptive, but rather a framework that you can be able to be to build your own system. So let’s jump into it.
Okay, so I know there’s a lot of arrows here, but I promise it’s not complicated because one of the things I learned for myself in trying to put together a budget, you know, I really don’t like the word budgeting, but a cash flow management system is that a lot of the, I guess the common folk law, let’s go through all of your expenses and break it down and put it into different categories and it gets all it gets very hard. And when a system is hard, it’s very hard to follow, and you might stick at it for a little bit, and then all of a sudden, something comes up and away you go and all of a sudden, you’ve got no idea where your money’s going. That’s right. So I really wanted to focus on something simplistic.
So obviously, when it comes to cash flow management, we start with income. So I include him in my household or my cash flow management. All income including any PAYG, or pay as you go and employment income, as well as any business and any rental income that’s coming in from my investment properties. So we start with our monthly income coming in, all of that gets directed into one investment account. So that investment account very importantly, is an offset account, and to try and give people a bit of framework against your most expensive debt. So what is what does that mean? So, assuming you don’t have again, assuming you don’t have, I guess, any massive credit card debt, but that’s a different topic. But what I mean by your most expensive debt, we go back to like good, medium and bad debt. So if I was if we keep in within the realm of property only, I would have my offset account against my principal place of residence because that’s my most expensive debt. Regardless, interestingly enough, regardless of how high if or the interest rate that I’m paying on my investment debt, my principal place of residence debt is always going to be my most expensive debt. Why? Because principal place of residence is not income producing, and therefore that debt is not tax deductible. So it all so all of the money that I’ve got coming into my household I’m pumping in to that offset account against my most expensive debt. And the idea of this system is to keep the most amount of money in that offset account for as long as I possibly can because that is ultimately saving me interest. Yeah. So there’s just a caveat on that.
When you’re first starting out in your investment portfolio, it may be a requirement that a certain amount of money needs to stay there because you may be negatively geared and that again comes back down to knowing your numbers. But as your portfolio grows, as mine is, all my money simply goes in there. And that happens to when you combine all the rent and the income that happens to be positively geared in my scenario.
So what I’ve done is I’ve actually set myself a budget for my fixed cost. So how much how that you know, phone bill and all those things, fixed cost that we said, once a month, I transfer a lump of money into my fixed cost account or you may be able to you may call it anything else in my household, it’s the joint account, and I’ve nominated my partner I call her the Minister for Home Affairs. She’s in charge of this particular account. She likes to all the decisions for that and and that’s what goes into the fixed account a certain amount of money goes into the fixed account. And in our household again, just showing you that this is a framework as opposed to a prescriptive system. We’ve just simply separated our incomes all of my income goes 100% into paying off mortgages and 100% of her income goes into the fixed cost account. And then we also put some money into the living and lifestyle side of things. So there’s a little bit of combination of a couple of different theories here the living lifestyle he or this you might think of this as the buckets as what was it the Barefoot investor talks about? And so we know that we’ve got money in that fixed account to pay bills every month. Or and also we we got to the stage where because the cash flows a little bit better in our portfolio, we have an allocation there for holidays, etc. So all those, all those expenses come out of that account. And ultimately, we’ve decided on a fixed amount to be transferred each week to us for our living in lifestyle, and we can go out and blow that every week. We can go for drinks, go out to dinner, do whatever it is we want to do, but we’ve got a fixed amount that gets allocated to that every week. And that’s our living and lifestyle budget for the week. Yeah. And by doing sorry, did you have a question?
I just want to say it sounds really simple. And it is, I guess, I’m just curious for the benefit of those that may not have an investment property they’re probably going to understand or a their principal place of residence. They’ve taken a mortgage before I think it’d be good to just touch a little bit on what you mean by an offset account.
Sure, not a problem. So offset account is so when you do take out a mortgage, whether it be against your principal place of residence or an investment property, an offset is a completely separate account that’s, that’s linked to your mortgage account, which is the account the amount of money that you owe the bank, and you’re free to put as much money into that account as you like. And by the name of it, it actually offsets the amount of interest. So I’ll give you an example. If you had a loan of $200,000, and you had $100,000, sitting in that offset account, the amount of interest that you would actually pay for that month would be on $100,000. So the difference between the loan amount and what’s sitting in the sitting in the offset account, and so that’s why putting as much money into that offset account for as long as you can, actually works to your benefit and reduces the amount of interest that you’re actually paying.
That’s right. That makes sense. Yeah, the idea here is to pay off your most expensive account first. And in this case, your offset would be allowing you to pay on just the the amount that you’re owing to the bank. So that’s why you’re saying all your income to go into the offset account.
Correct. And the the other the other great benefit of using an offset for me is that I’m someone that likes a lot of control. So a lot of a lot of people a very hell bent on taking that excess money and paying down their loan. For me, that doesn’t really make a lot of sense. And the reason being is if I park it in the offset and and get the interest benefit or the reduced interest payment, I like to have control over that amount, of that money. So I could use I use that as a buffer. So if you go through COVID-19 if I was to have a tenant that moved out I couldn’t find another tenant in one of my investment properties for a month, I could just simply take the money out of that offset account that has built up over time and pay and continue to pay the mortgage. So I have that flexibility. But the other thing I use that offset for if times are good as money accumulates in that offset account, I know when exactly when I’m in a position to use that money for an additional deposit for my next investment property or whatever it may be. That money is siloed within that investment account for investment purposes, and that’s why I classify this as a machine that I simply keep going, money keeps flowing around. And ultimately, I know money keeps accumulating in that offset account that I can use for either the buffer or further investment purchases.
Well, this is a good segue for me to say that this all this is advice if you want to call it that of general nature. So please seek your accountant or your financial planner, you want to go in depth about what this all really means, obviously, the offset account and all its intricacies would only be relevant if we understand your situation. But I guess I, you know, Andrew, you’re talking about it from a very general point of view, the benefit of having an offset account.
Correct, correct. Yes. And one other one other thing that I just draw your attention to, is I put up here a little thing for credit card. Now I personally don’t do this. Interesting story. I’ve never actually had a credit card in my life. You know, the bad debt side of things. But there is a way to utilize a credit card for some people to, I guess, accelerate this and keep money in the offset for a little bit longer. So some people actually for their fixed costs, because they know that not going to overspend there, what they do is they keep the money in the offset account, pay that all their fixed costs on a credit card, utilize what? Whatever interest free period they might get so 30, 60 days, and then simply wipe the credit card clean out of the offset. So that’s another way you can use to accelerate. I generally don’t, I don’t recommend that too often. And the reason being is you need to be very much in control of your money and very disciplined, but it does provide a benefit.
Yeah, no, absolutely. I only got a credit, because I get points for it.
Now, I don’t even know what points are.
Yeah. So just just just to wrap up, and thanks for your comment. Ken, I hope you got some value out of it. I guess this framework so there’s not, as I as Colin mentioned, this is very generic in nature. And it’s not one way to slice a cat and it’s not in response to people’s specific circumstances. So it’s designed to be that framework to use. But the objective of it is to put like put in place a system that keeps as much money offset against your account to reduce your interest bill for as long as it can. It’s very simple. And the reason why I’ve put a little quote there from from George George Clayson, who wrote the Richest man in Babylon, which is a fantastic book that if anyone hasn’t read it is 10% of what you what you earn is yours to keep. So the money from your income goes into the investment account first, and that gets allocated out into the fixed cost and the living lifestyle costs.
And I know for some people, this might be a little bit complicated or new information or it’s not something that you’re familiar with. Very happy to share this, if you want to go through in your personal circumstances. So feel free reach out to us at inspirerealty.com
It would seem what Colin was you found?
not too sure what you mean by that. I think he might be being cheeky.
Thank you very much for that Andrew. There are a lot of very, very good, you know, pearls of wisdom in there. I like how you’ve got a very simple system, a system that you can follow every every dollar that comes in from your income to go into an investment account, however you want to set it up, pay your fixed costs, and then you can have your balance to be spending it on living in lifestyle. Yeah, so I think the idea is just you know, I think a lot of I find a lot of people when they think about property, property, it’s it’s an isolated thing. It’s an investment. But I think it’s important to know your numbers and do property and finance at the same time. I mean, that’s the foundation. You need you need to know your numbers you need to manage your cash flow. You need to manage your wealth you need to know where how much money you’ve got in what your cash flow positioning is, before you start to look at property. So if you’re interested in having that further discussion with us unpack all that with you, feel free to visit our website, www.inspirerealty.com there are plenty of free resources in there for you to to look at. But more importantly, if you want to book a free strategy session with us, it’s a 45 minute complimentary session. And it’s a chance for us to get to know you, for you to get to know us and really explore how we can best help and assist you. So yeah, thank you so much for your time, Andrew, that was wonderful. Thank you. No, no, I have notes myself. So looking forward to next, the next series with you, Andrew.
Awesome. Thank you very much. Have a good evening, everyone.