7 Finance Mistakes Sabotaging Your Success

February 2, 2014 Sam Saggers

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If you expect to achieve financial freedom through property investing without making any mistakes then you’re quite mistaken. You will make mistakes, of that I’ve no doubt. We all have.

What is MORE important than making mistakes is learning from them – using the knowledge we’ve gained through both our failures and our successes is what can carry us forward as property investors.

Yes, we can learn from our own mistakes BUT an even better scenario is to learn from the mistakes of others. I’d like to share with you 7 Financial Blunders that I have often seen among property investors, especially when they start building their property investing portfolios.

Mistake #1: Increasing your credit card limit

Credit cards can be a drain on your finances, especially if you have a large credit limit and your card is maxed to the hilt!

Rather than accept every credit card limit increase that the bank sends your way, keep your credit limit low – $2,000 is a good figure – and use it only for emergencies. Alternatively, cut it up and cancel your account.

Mistake #2: Using only one lender

A common mistake that I see time and time again is the use of a single lender for every financial need. This strategy works in the bank’s favour, not yours. If you have your car loan, personal loan, home loan and investment loan with a single lender you are effectively shutting down your property investing future.

Once you reach a certain financial level, the bank will seize all of your equity, impacting your ability to continue growing your investment portfolio. Unless you love haemorrhaging money, you don’t want to do this! Assuming you like to keep your cash, simply use multiple lenders for each financial need you might have.

Mistake #3: Cross-Collateralisation

When dealing with lenders remember that they are focused on minimising the risk to themselves, choosing to shift as much risk as possible to you, their customer. It’s up to you to not let them!

For example, if you want to use your equity to purchase another investment property, your lender may suggest you let them connect the properties together so that they have security over both rather than withdraw your equity as cash.

This is a mistake – one that will limit your LVR, keeping you from borrowing more money.

Mistake #4: Allowing an “all monies clause”

One of the best clauses every bank will try to put into a mortgage is the “all monies clause”. Of course, when I say “best” I mean it’s best for the lender, not you. In fact, from the view of a property investor it’s one of the worst clauses and you do not want it.

In essence, this clause allows the bank to take any of your available funds on account with the bank including bank accounts, savings, credit cards and mortgages to be applied to your mortgages.

We have had countless numbers of clients impacted by this nasty little clause. One gentlemen sold his business, and while he was on holiday the bank took the proceeds ($1 million) in his bank account and applied it to his mortgages. Of course there was nothing he could do about it, as it was all perfectly legal. Thanks to this verbiage, this man – who was 65 years old – is out money he had counted on having.

To avoid this kind of heartache yourself, read your contracts with a fine-toothed comb – making sure there are no “all monies” clauses. If you find one – or several – speak with your personal finance professional about getting the clause removed.

Mistake #5: Co-mingling business and personal finance

Simplify your accounting by keeping your personal, business and investment savings separate. Rather than establish a redraw account for your business and attach it to your personal home, withdraw the money and “lend” it to your business. When it comes to finance, remember the K.I.S.S. principle – Keep It Super Simple and keep your accounts separate!

Mistake #6: Failing to comprehend what makes Principal + Interest different from Interest Only

Your choice between the two comes down to your particular situation. A mortgage which is principal and interest will pay down your mortgage, however it puts a pinch on your ability to buy more investment properties. This kind of a mortgage works best when you’re in the consolidation phase of property investing and are looking to pare down your investment holdings.

An Interest Only mortgage works best when you are attempting to build up your portfolio as it delivers the best bang for your buck in terms of serviceability. In other words, you’ve got more money to pay the bills, so to speak!

You’re paying out a lot of money when you buy an investment property so it’s unwise not to understand what you’re doing. Get informed before choosing your loan type.

Mistake #7: Not using an offset account

One of the best ways to boost your financial situation, pay off your mortgage faster and achieve your financial goals sooner is to use an offset account.

Set up as either a transaction or a savings account, an offset account is linked to your home loan. Every bit of money you put into the account offsets the balance in your loan account, which equates to less interest coming out of your pocket.

Seriously though – you can shave thousands of dollars – and years – off of the life of your mortgage. While this is an absolutely fantastic way to manage your finances, want to know what’s even better? You are always in control of your extra cash, so if you need to pull out a few, you can certainly do so!

If you’d like to learn more about the wide variety of creative (and legal) property investing strategies, including something as outlandish as paying off your mortgage in six (or fewer) years, come along to our next FREE Property Investor Night. You’ll be glad you did…and besides, where else would you rather be than surrounded by a bunch of investors like yourself?

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