Save more and retire sooner!

‘Cash is King’ is an oft used term and in the context of a wealth creation strategy no truer words have been spoken.  You can have all the objectives you like but if you don’t have the free cash flow to achieve them they will remain objectives only and never a reality.

So, the journey to helping a client achieve their important personal goals will almost always start with their cash flow.  This case study deals with this most important component of any wealth creation strategy.

Please feel free to share it with someone you care about if you think they may benefit from reading about how improving free cash flow can help them!

What is the objective?

Generally, APC would want to increase ‘free cash flow’ or a client’s savings capacity.  If we can do this then we can propose a strategy to use this free cash flow to generate capital growth and income generation and help them achieve their goals sooner.

Pay yourself first

The most powerful concept for improving ‘free cash flow’ is the idea of paying yourself first which works like this;

  1. Understand your NET income AFTER TAX
  2. Detail your expenses, broken down by the following categories;
    1. Not Negotiable Expenses – must pay expenses
    2. Nice to Have spending – doing things that bring a smile to your face
    3. Luxurious spending – absolute indulgence!
  3. Subtract 2 from 1 and you have your savings capacity or free cash flow

Now, when you know the answer to step 3, this figure is the amount you ‘pay yourself first’ by committing it to a savings or wealth creation strategy before you do anything else.  This is a powerful yet simple strategy which can make a material difference.

The Clients – Professional couple with three pre-teen children

After providing our online budget tool, an initial analysis of their cash flow yielded the following information;

Whilst positive this free cash flow was not enough to achieve the personal goals of our clients.  So the following activities were undertaken;

Review of their debt repayments

Many people actually have mortgages and loans that are not market competitive.  Banks do not automatically re-set all variable loans to the current market rate.  They change your existing loan rate by whatever margin is being increased or decreased.  So if person A started a loan at 5% and person B started it a year later at 4% and the bank decreases their loan book by say 0.25% then person A’s rate goes to 4.75% and person B’s rate to 3.75%.  Person A doesn’t automatically get B’s market competitive rate!

In this case study, the clients have two loans, a home mortgage and an investment property loan, both on principal and interest (P&I) repayments which together are $83,712 per annum. APC recommended re-writing the loans and using a mixture of fixed and variable loan structures and achieved a significant reduction of their annual repayments to $61,932.  This generated an increase in free cash flow of $21,240 per annum.

If you have friends or family members who have a mortgage or investment loan, APC has an appraisal service to check if the rates they have are market competitive.  In addition we can also provide some guidance with regard to the structure of their loan(s) – fixed versus variable.  This appraisal is at no charge and is exclusively part of your Private Client Service.

If you are interested just ask any member of the APC advice team.

Other Expenses

In addition to creating free cash flow from lowering the servicing cost of their debt, we also reviewed their general expenditure and highlighted some areas that they could, together, consider if further areas of savings could be found.

After reviewing this together they found an additional $15,060 of savings by re-calibrating expenditure and placing a higher priority on the achievement of their longer term goals over some of the shorter term spending decisions they had been making.

In total, once the exercise was complete a total of $36,300 of extra free cash flow was generated or just over $3,000 per month!  To put this another way, for this couple it was like receiving a $74,000 pay rise!

Now, with a new free cash flow of $73,950 the strategy has the oxygen it needs and the clients can see a path way to achieving the goals that are personally important to them and their family.

Give yourself a pay rise!

If you would like a fresh review of your overall cash flow to see if you can increase free cash flow and give yourself a pay rise, please feel free to make contact with any member of the APC advice team

We’ll be happy to help!