Time vs. money? Active and passive income ratio

  • March 4th, 2020
Wow, it's March already. I guess there's no denying time really does "march on" — pardon the pun! Maybe this is as good a time as any to ponder what time means to you, especially when it comes to your investing. Time is something we often take for granted. You know how it goes: “That can wait” or “I'll get to that tomorrow”. But can it, and will you? Is there anything you've been putting off for days, weeks, months, years...or even decades? Ask yourself this: "What is the one thing in my life right now that I can’t do because I don’t have the time?" Maybe you're thinking it would be more appropriate to ask, "What is the one thing in my life right now that I can’t do because I don’t have the money?" But see, in my humble opinion time is more valuable than money. Why would I say that? Because whilst you can never create more time, you can always create more money. Also, the more money you have, the more of your own time you can buy back. Sounds good, doesn't it? RECLAIM YOUR TIME, RECLAIM YOUR LIFE What 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. Furthermore, due to increased access to quality internet and more flexible working options, The NBN Super Connected Lifestyle Locations report forecast that by 2026, up to 8% of the workforce would be working from home. Part of the Melbourne Plan 2050 document calls for all Melbourne residents to be able to live within a 20 minute commute to their employment in their push to decentralise Melbourne. WATCHING SCREENS The Australian Multi-Screen Report, combining research from Nielsen, OzTAM, and Regional TAM, found Australians watch an average of 97 hours of television every month. That comes out to an average of 22.4 hours per week or over three hours a day — while every week still finding eight hours to watch video on a computer, almost two hours on a smartphone, and one hour and 47 minutes on a tablet. This equates to about 1 month a year dedicated to watching TV for the average Australian. Sitting has even been branded the “new smoking” for its supposed public health risks, especially for people with office jobs that also require long hours sitting. 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. Unsurprisingly, young Australians on average performed 7.72 hours of planned exercise each week (structured workouts and gym visits) — almost double that of older adults, who performed 3.36 hours. However, incidental movement (such as shopping, gardening, and housework) was reversed, with the over 50s doing around twice as much as 18-24 year olds (perhaps the younger cohort are too busy in front of their devices). If you have been adding these average hours up, you’ll have noticed we’re at nearly 137 hours for the week. We haven’t included time spent on other hobbies, quality time with family, socialising, spiritual pursuits, grooming, shopping, etc. Oh, and if you want to become a high level investor, you better add in at least 10 hours a week for that as well. But the average Aussie will only have around 30 hours per week to do all the things they want to do and actually “have a life”. ACTIVE INCOME RATIO & PASSIVE INCOME RATIO Perhaps 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 costYour average investment return capability Starting with the end in mind, let’s assume that the minimum lifestyle cost is $60,000 p.a. — as we have done in the example above — and the average investment return capacity is 8%. Dividing $60,000 by 8% gives us a nest egg figure of $750,000. Now this “nest egg” figure represents investible wealth and excludes any equity in your own home, for example. Now, 8% may not be achievable by the average investor. As such, if you could only achieve a 4% p.a. investment return, then you would of course require a much larger $1.5 million nest egg. 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.


  • February 19th, 2024

Is Your Mortgage Holding Back Your Investment Dreams?

Homeownership has long been a pillar of the Great Australian Dream, a symbol of security, and an investment in one's future. Yet, in the grand narrative of personal finance and real estate, we often overlook a crucial question: Is your mortgage holding back your investment aspirations?

read more
  • September 5th, 2023

Rate Steady at 4.1%: Benefits for Property Market Investors

The Reserve Bank of Australia's decision to leave the cash rate at 4.1% is a welcome relief for buyers and investors in the property market, and The Property Mentors can provide guidance and support needed to take advantage of this opportunity and make wise financial decisions about your investments.

read more