“Strategic spending” in an uncertain world

Posted by Mike H on 15 August 2016 | Comments

A thought occurred to me whilst writing last week’s blog. The current investment environment seems quite uncertain if not outright dangerous. Rather than a miserable compromise just in case things turn bad I wondered if life would be better if I were to spend money “strategically”.

What if I approached how I spent money in the same way that I invest it? First, measure the risk, then minimize it:

Here are a couple of examples I thought of:

I decide I want to live well in the inner suburbs

“Bull market” approach: buy an expensive home in an expensive suburb.

“Risk off” compromise approach: buy a cheaper property further out to live in it, invest the rest, and commute to the good life

“Risk on” strategic spending approach.

I ask can I confidently lock up this much capital? What are the future risks? Do I have adequate contingency plans in case my income significantly falls (or health, etc.)?

In this case suppose I have the money but I don’t like the possible liquidity risk of the first approach. However, I decide I can lower that liquidity risk but meet my goal.

  • I buy a much cheaper property I would be comfortable living in and lease it out neutrally geared or paid in full depending on my circumstances.(naturally being a risk manager , I have ensured the second property is close to family, shops, transport and excellent community support services. I also check that it is easily modified if we become frail).
  •  I then rent a luxury apartment in my dream location.
  •  I safely invest the any remaining capital to pay for the balance of the dream home rent.

If there is an income crisis I simply give notice to both landlord and tenant and use that investment income to pay interest payments. If the market improves dramatically it is simple and cheap to reverse the process. If not, I pay out the mortgage.

I want to travel around Australia for a couple of months each year

“Bull market” approach: I write out a cheque for $80,000 plus for Caravan.

“Risk off” compromise approach: I buy a $ 10,000 campervan

“Risk on “strategic spending approach:

I calculate the annual cost of owning this asset

Say the cost is $ 80,000 for the caravan

Depreciation  (10 %)                                                             $8000 PA

Loss of investment opportunity (say 3 %)                                 $2400 PA

Miscellaneous: a bigger car to pull caravan, increased fuel costs, registration, insurance, maintenance and repairs, caravan park fees, storage costs Etc. (say                                                                                            $5000 PA

Total (first year)                                                                     $15400PA

Cost benefit analysis I conclude that

1.Even if I only spent the investment return and ancillary costs ($7400) we could be holidaying for best part of 2 months each year. (staying in B&Bs, hotels or even hiring a comparable caravan for that time

2.In fact adding in the depreciation cost of owning a caravan amount would easily cover the cost of us holidaying 3-4 months every year!!

I feel more comfortable with spending that money as I go along; and retaining easy access that $80,000. It is also now simple for me to immediately cut back on holiday expenses if finances get really grim.

In both cases my dreams are still fulfilled but with lower risk

I know, this approach may seem a little over the top but thinking outside the box is occasionally a worthwhile exercise.

Before acting on any information in this article it is important to do your own research, then discuss with both your investment advisor and your expenditure advisor (they are easy to find. If you are like me, you already have a family full of them ;-)

Regards

Mike H

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