Reclaim your time, reclaim your lifeWhat do you do in your life on a regular basis not because you want to, but because you think you have to? As I write this newsletter, I have my house cleaner buzzing around vacuuming, mopping, scrubbing, and washing. Having a clean house is an outcome I want, but not a job I choose to do myself. That is just one of the jobs that I outsource to someone else, either because they are more passionate about it, better equipped to do it, or just plain better at it than I am. And as a bonus, I’m helping create a job for someone else! But the main reason I do it is that I value my time. The time spent not cleaning can be used doing things I am more passionate about. And when your actions are driven by your passions, you tend to create more value in life.
What value do you place on your time?Think about it. $20/hr, $200/hr...$2,000/hr?! If you have a job, this is pretty easy. By and large you’re paid on an hourly rate or salary for the number of hours you work. Now divide your weekly salary by the 168 hours in the week. That is what every hour is really worth to you. For example, if you earn $1680 per week, every hour you spend on the planet is mathematically equivalent to you earning $10.
Let’s do some maths!Calculate how many hours you spend on the following activities per week:
WorkThe average Australian is now working 40.6 hours a week. West Australians taking the title of longest-working Aussies with an average of 41.1 hr/wk, while and Tasmanians dragging the chain with a low of 39.7 hrs per week (as of Aug 2016).
SleepFor example, 56 hr/wk. The recommended intake of sleep is 7 — 9 hrs for an adult.
CommuteIf you’re the average Australian, you’re spending 4.5 hours commuting every week, according to HILDA 2013 data. Interestingly, a report by recruitment firm Hays revealed that more than half of Australians would drop their salary by as much as 20% to be able to work from home and a further one in five would take a 10% hit.
Exercise/SportGalaxy Research, in a study of over 1,200 people, has found that Australians over 50 were engaged in an average of 14 hours of physical activity per week. A similar amount was found for 18-24 year olds. The study broke down physical activity into 3 categories: planned exercise, play and incidental movement.
Active Income Ratio & Passive Income RatioPerhaps the solution is to stop trading time for money — and start generating a passive income ratio greater than 1 to 1. See, most Australians are turning up to an office, cubicle, or worksite and trading an average of 40 hours a week for the money just to run their lifestyle. And that’s all after taxes, of course! For example, an individual with a current income of $10,000 p.m. ($120,000 p.a.) and a lifestyle cost of $5,000 p.m. ($60,000 p.a.) has an Active Income Ratio (A.I.R.) of 2 to 1 and a Passive Income Ratio (P.I.R.) of 0 to 1 (assuming their job is their only source of income). In other words: if they don’t work, there is no other income (Passive Income) to fund their lifestyle. Now, the goal for this individual may be to start to invest their surplus active income to start the process of increasing their P.I.R. over time. In this case, they have around $5000 per month in surplus funds. However, assuming they have no depreciable assets (e.g. investment property), then they would need to pay the Tax Man around $2,690 p.m. ($32,280 p.a). This leaves them with only $2,310 p.m. ($27,720 p.a.) for investment purposes. If they managed to save this additional income for investment purposes over say the next 10 years, they would have an amount of $277,720 to invest in 10 years time. Now, what could we do with that “nest egg” amount of $277,720? Well, if we used it purely to fund our lifestyle of $60,000 p.a., it would last less than 5 years. That might not work for Australians who are living longer and longer — and of course does not account for the depreciating effects of inflation. If however we did not touch the principal — and lived only off the interest on the nest egg value of $277,720 — how much of our lifestyle could we fund?
Well, that depends on your skill as an investor.At 5% p.a. returns, you would make $13,886 p.a. That equates to a Passive Income Ratio of just 0.23 to 1. If you were a better investor and could achieve say a 10% p.a. average return, you would still only make $27,772 p.a. That Passive Income Ratio is still a paltry 0.46 to 1!
So what size nest egg do investors need?That depends on 2 factors:
- Your lifestyle cost
- Your average investment return capability
So what is your personal A.I.R and what is your P.I.R?Need help increasing your P.I.R? Glad you asked. Get in touch with one of our Senior Property Mentors to discuss your options. This is especially important for older Australians approaching retirement who haven’t yet planned for a P.I.R of 1 to 1 or more. But this is equally important for younger Australians, especially those with good A.I.R’s. The earlier you start to create a plan to achieve a P.I.R of 1 to 1 or greater, the sooner you can leave the rat race and start living a truly extraordinary lifestyle.
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