6 Tips to Live on Half Your Income (& Invest the Rest!)

26

Think it’s a pipe dream, putting half of your after-tax income toward investments?

Then you’re not thinking hard enough.

Investing in real estate costs money. The more money you can put aside to invest, the more you can potentially earn in returns. And ultimately, that’s the goal: creating financial freedom by making more money.

So if it takes money to make money in real estate investing, how can you set aside more money for your investments? Here are six tips to start living on 50% of your after-tax income.

6 Tips to Live on Half Your Income (& Invest the Rest!)

1. Your monthly budget must be based on four weeks’ pay, not your annual pay divided by 12.

Budgets don’t live on paper. They live or die in the real world, based on actual dollars coming in and going out.

In the real world, you get paid four weeks’ worth of paychecks in most months, and occasionally you receive six weeks’ worth of pay in a month (assuming you’re paid biweekly). Your budget needs to be based on what you can consistently expect to earn, not based on a theoretical fraction that exists only on paper.

On months when you do receive that third paycheck, congratulations! You can shunt that entire paycheck into your savings account. (What, you thought I’d tell you to go buy another trendy gadget or a 15th pair of shoes to almost-never wear?)

2. Start with your after-tax, after-savings income.

Most people start their budget by looking at their current monthly income and writing out their expenses. Don’t do that.

Practically speaking, investing half your income means living on one biweekly paycheck per month — two weeks’ worth of pay.

I can see you sitting there shaking your head and thinking, “There’s no way.” But if you got fired tomorrow, spent the next nine months unemployed, and eventually took a job making half the income you are now, would you figure out how to survive? You would, of course, but probably not without making some serious spending adjustments.

Now that you have an income to start from, list out your fixed monthly expenses: mortgage/rent, car payment, etc. Then list out your recurring but variable monthly expenses: utilities, groceries, gas for your car, etc. Finally, list out all annual or semi-annual expenses, both fixed and variable: insurance, accounting, gifts bought for others (Christmas gifts, birthday gifts, wedding gifts), and so on.

You’re undoubtedly deep, deep in the red by now, and you probably haven’t even accounted for discretionary spending yet. That’s OK. We’ll help you trim the fat.

habits-hold-back-success

Related: 7 Toxic Money Habits That Harm Your Financial Future

3. Slash your housing cost with a roommate.

Housing is most people’s biggest expense, so start by looking to cut there first.

Earlier this month, SmartAsset released a study showing that on average, a person splitting a two-bedroom apartment rather than leasing a one-bedroom apartment saves $420.70/month on average. In some cities, like San Francisco and New York, that number is well over $1,000/month in savings.

Married? Have a family? That doesn’t mean you can’t rent out a spare bedroom.

The benefits don’t stop at cheaper housing payments. Utility bills suddenly divide into smaller pieces, and roommates can help out around the house with cleaning, cooking, upkeep, and errands.

If you’re lucky, you’ll even end up with a lifelong friend. I lived with several roommates in my 20s and 30s (before my wife kicked out the last one), and they remain some of my closest friends to this day.

4. Buying used should be your first impulse.

Sure, some things you shouldn’t buy used. Sheets, towels, toilet paper — you get the idea. But most “things” in life you can — and should — buy used.

On average, new cars depreciate 20% in their first year of ownership — and another 15-25% in their second year. Is a two-year-old car 40% lower quality than a new car? In most cases, not even close, but you’re getting a 40% discount nonetheless.

Furniture loses value even faster, but doesn’t lose functionality, and in many cases, it doesn’t even lose aesthetic value. None of your guests will be able to tell the difference between a two-year-old used piece of furniture you bought yesterday and a new piece of furniture you bought two months ago. But the difference in cost? It’s routine to see furniture that retails for $1,000 selling on Craigslist for $100.

The list goes on: clothes, electronics, appliances. I’m not saying you should never buy new, but your first impulse should be to check available used items first. If you can’t find a used, quality version of what you want, then look into buying it new. But train your brain to think “used” first.

clothes-shopping

5. Shift your social life away from businesses.

The average markup on food and beverages at restaurants and bars is 3-4 times the retail price. Why pay that markup all the time when you can eat and drink the same quality stuff at your friend’s dinner party instead of a restaurant?

Start shifting away from always going out and toward organizing events at people’s homes or nearby public areas. From backyard decks to pools to parks and beyond, there are plenty of places you can congregate without needing to pay the steep markup charged by businesses.

We and two other families spent last Friday evening having a bonfire on the beach underneath a nearly full moon. I enjoyed some high-end Dogfish Head beers (the Immort Ale, for enthusiasts) while roasting s’mores and occasionally venturing knee-deep into the water. The total cost? A whopping $15. Another group of friends went out to local bars and spent around $100 apiece. When we ran into each other the next day, they were surprised to hear about my Friday night and said, “That sounds really fun. I never thought of that!”

Get more creative and stop just defaulting to the same old patterns of going to businesses for your social life.

6. Get a raise!

Sick of playing defense and slashing your spending? No problem — go get a raise. Whether that means talking to your boss about a raise or going and finding a higher-paying job, don’t be shy.

Related: 12 Reasons You’re Poor

Explain in detail to your boss or a hiring manager why you do/can provide them with incredible value. Demonstrate in as many creative ways as you can that you will help them reach the next level and why you’re an invaluable addition to their team.

Remember, you aren’t limited to your current field, either. Think bigger about what other career paths that intrigue you and may pay better.

But here’s the thing: When you get the raise, you’ll be tempted to spend more. Remember that the goal here is to invest more of your income in real estate or other investments, not to show off to your friends and family how well you’re doing.

You don’t need a bigger house; you need a bigger real estate portfolio. You don’t need a flashier car; you need a way to get around town to your properties. Love a bleu-cheese-encrusted ribeye? Don’t go to that pricey French restaurant. Instead, learn to cook (and then pair that ribeye with a delicious Haut-Médoc that you bought for a quarter of the price at the wine shop instead of snooty Chez Pierre).

Reining in your spending is scary and painful at first. But as you watch the Benjamins start stacking up at an astonishing rate, you’ll suddenly find yourself OK with a gently-used couch instead of the same couch bought at a store. As your investments (real estate and otherwise) mount, you’ll start seeing extra income from them. Reinvest these returns as long as you can rather than spending them, and one day in the not-too-distant future, you’ll find that your investments are actually bringing in enough to cover your modest expenses.

How much of your after-tax income are you saving right now? What’s worked for you in setting aside more of your income for real estate investments?

Don’t be shy — spill the beans!

About Author

Brian Davis

Brian is a real estate investor and landlord with 15 rental properties, who writes fascinating articles for SparkRental.com. His rental management is almost completely automated by now, allowing him to travel the world frequently (if not always in style).

26 Comments

  1. Great article. We are doing this. I bank my income and we live off my husband’s. Question about next steps: We have two rentals with $87000, and $100000 outstanding on low rate mortgages. Would you pay down mortgages with cash flow or buy a third property? Good problem to have but money sitting in an account is not working for us. Thanks

    • Brian Davis

      Thanks Jack, and congratulations on banking your entire income! If I were in your shoes, I would personally buy a third property. If you invest well, you’ll earn a much, much better return than the 5-6% interest you’re paying on the mortgage. You’ll get instant extra cash flow, which you can turn around and reinvest.
      Best of luck!

    • Daniel Jackson

      Would you leverage the next property, or pay all cash?

      I agree with Brian, in terms of attaining additional cash flow. Leverage is great, assuming your rental income is always above your fixed costs. However, I would suggest talking through some “unexpected” scenarios.

      For example, how much job security do you both have? If you lose one income, God forbid, how does that affect your financial position in terms of meeting existing financial obligations? What if you have to go on maternity, or have a complex pregnancy? I, obviously, have no clue what your plans are in life, but I think it is a good example most can relate to. Given how many employers do not compensate for the entire duration of maternity leave, would you be able to meet all of your financial obligations?

      If you perform your analysis, and you are well off, then go for it. However, if you may find yourself in a painful place due to a unforeseen circumstance, then you may want to consider paying down your liabilities, before leveraging yourself more. As I’m sure you know, as people/entities/countries leverage themselves more, their default risk to their lender increases, thus increasing your cost of capital (increasing the interest rate at which your lender is willing to lend to you). However, if you pay down your existing mortgages and wait a bit, it may put you in a better position to handle the unknown. It may also make a considerable difference on your future cost of capital?

      Just some thoughts to consider.

    • Charles Morgan

      My strategy has been buy. I don’t have your income but whenever I can scrape up enough I buy. The only ones I want to pay off are the hard money 10.5% loans. Even those can wait though if I can get a deal that pays back something close to 10%

  2. Great article that will make some folks think! I have to add a few comments…

    Bring in boarders to your home won’t fly in many circumstances. First, it does effect your day to day life and privacy in your home, so that wouldn’t work with my wife! Second, it’s against zoning in some areas and HOA bylaws. So check into that before you rent!

    Cars are a big expense and I can agree with the advice here. I search for low mile older cars that have been garage kept by older original owners. Our Buick LaCrosse cost $8500 cash, with 30,000 original miles. The PT Cruiser convertible I bought this summer with 60,000 miles on it cost me $6000 cash. No car payments, lower insurance too. And they both drive and look like new.

    I haven’t bought new in the last 20 years. If you do need to buy a brand new vehicle, buy one that you plan on keeping a very long time. For instance the last vehicle I bought new was a 1996 Dodge Grand Caravan. I bought the expensive model with the TVs and VCR to get through my kids childhood. Same vehicle was used to for 8 years of college moves, and several household moves for my daughters! Today it has well over 200,000 miles on it and is used as my Home Depot run vehicle. So I certainly got my money out of it!

    Entertainment! Become a Happy Hour junkie! My wife and I go to our favorite pub once a week for discount drinks and $5 appetizers. I get the wings and she gets the pizza (which I help finish!). Bill is usually under $25 instead of an expensive full course meal elsewhere. And never dine without a special or a coupon! Why not get one meal free?

    Furniture! Why not buy nice antiques at a discount rather than new cardboard furniture? It will have value when you want to liquidate it rather than putting it out at the curb. And if you know what you are looking at you can score big. I used to buy high end furniture for office lobbies. I came across a lightly used Sherrell couch at a consignment store for $500. That’s a $5000 commercial quality couch new. We took a photo and returned to the store the next day to find it reduced to $300. It’s the best piece in our living room! And I will probably be able to sell it at a profit someday.

    And don’t throw things away! If you have goods that have life left in them, sell them via a Craigslist ad or donate them to a worthy cause. You will get a tax deduction for doing so, save something from going to the landfill and put it with someone who can use it!

  3. Wesley Emison

    Brian, thanks for the article. I know this is outside the scope of what you wrote but I have a question, maybe just to give myself some fresh ideas. When one is going down the path of saving for their first or their next deal would you suggest keeping the savings in a savings account at a bank, some sort of short term pretty safe investment or something else? When saving $1K or less a month it might be helpful to add on where to park that cash while closing the first or the next deal. Thanks for your thoughts here.

    • Brian Davis

      Hi Wesley, personally I keep my liquid funds in a savings account. Some people prefer money market accounts, because they pay more in interest, but personally I don’t get excited about how much more they pay and like having my savings sitting right next to my operating account. Sometimes if I know I won’t use the money for 6-12 months, I put it in a stable blue chip stock, but ultimately I prefer keeping my real estate investing funds where I can instantly access them.

  4. Mel K.

    Great article Brian! Finding new forms of entertainment is always challenging. But being creative is definitely the way to keep things fresh. For instance, instead of going to the regular movie theater and paying $40-50 on tickets and grub, go to a local drive-in where you get deals to watch two movies for $6 per person! Bring your own snacks and save as well.

    • Brian Davis

      Thanks Chas, yeah that one has certainly made a big difference in my own spending! I used to spend an enormous amount of money on meals at restaurants, then I decided to get serious about learning how to cook. I now eat just as well and spend 1/4 as much.

  5. Tina Gallagher on

    We have been doing this. Sold everything we didn’t need including the dining room table, we have a huge kitchen table. So we were able to buy our first flip house all cash! It’s all profit (and taxes) from here. You have to sacrifice something to get started!

    • Brian Davis

      Congratulations Tina! That’s fantastic. If you can put all your proceeds from that sale into your next property, you’ll start building some incredible momentum. The world is your oyster! (I’ve never quite understood that expression but it has a nice ring, doesn’t it?)

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php