Growing Your Travel Fund with Property and Shares

Travelling costs money. Over the years we've learnt a little about saving for travelling and saving money while travelling. For more on how we've done this, head over to our Money section.

So you've now managed to get on top of your spending and you're putting away some of your income for travelling, which is awesome. But how can you make that money grow for you so one day you can work less and travel more?

Investing is the key to growing your money and the two areas where we've invested over the years are shares and residential real estate. Although our preference lies with share investing (the reasons for which I've highlighted below), we also have property investments. There are of course plenty of other ways you can invest your money but these are the two we have focussed on.

You: But I don’t know anything about shares and isn’t it like gambling?
Me: Well I didn’t know anything about shares once either! And once you understand the type of investing I’m talking about, then it’s far from gambling.

You don’t have to be a genius to understand shares. In fact, if you try to over analyse it, it’s probably detrimental to your long term investment returns. You’ve probably read about charts, following trends, day-trading and then yes, it becomes pretty damn confusing!

But I’m not talking about that. I’m talking about buying a share in a great company that’s been around for awhile, with a good track record that looks like it’s going to be around for a long time, and staying a ‘business partner’ in that company 'forever'. This company will continue to make money, hopefully ahead of inflation, and when it’s time to distribute the profit, you’ll get paid a dividend (in Australia half yearly, in the US quarterly).

For me, what I like about shares are the following:

1. It’s mobile - it doesn’t matter where I am in the world, I can log into my broking account and execute a trade.

2. I don’t have to put all my eggs in one basket. If I like a bunch of companies, like ABC, CDE, MNO also XYZ, I can split my money between them and buy a ‘share' in each company. If I compare that to property, it’s pretty hard to do that. Buying one property at $500k pretty much means I’m not buying another for quite awhile! Don’t get me wrong, I’m not against property investment, and owning your family home is something I definitely advocate. Just saying that it’s a little easier to diversify with shares.

3. Following on from the above, it’s really, really easy to continue to buy shares. You can even buy a little extra every month. In fact, that’s the best way - it ‘forces’ you to keep investing. N.B. You can achieve a similar thing with property by making extra, regular repayments on your mortgage.

4. Low maintenance - I don’t have to talk to property managers, do repairs, or worry about tenants (paying rent on time or damaging the property).

5. Dividends - the big one. If you stick to your plan, eventually your share portfolio is going to pay you enough to live. Or at the very least, supplement your income so you can get away from your 9-5 job and work part-time or remotely. You won’t have to earn as much from your job because your share dividends will be paying you some income too. Historically, Australian shares pay a 4% dividend yield, that’s fully franked. What, did Mick just swear?? What’s this fully franked business? It’s really simple actually - all it means is that the company paying you a dividend has already paid 30% tax on it (the current company tax rate in Australia). That means you get a ‘franking credit’. So for a $4 dividend, you’ve already paid around $1.70 in tax so really your gross income is $5.70. Nice! Depending on your income and tax bracket, you may get some (or all) of that $1.70 back on your tax return. Or you get to keep the whole $4 without having to pay extra tax.

6. Reinvestment of Dividends is really, really easy. When you’re in your growth or investing phase, i.e. you’re not using your dividends to supplement your income yet, you can very easily reinvest your dividends by allowing the company you own shares in to do it for you. Many Australian companies offer a dividend reinvestment plan (DRP) - you check the box and then forget about it. Each dividend payment is used to buy more shares in that company. This is such an excellent form of compounding interest (take a look at Jen’s article) and really supercharges your returns.

You: How do I know which companies to buy?
Me: A very good question!

When you start out, you need a support network so you don’t feel like you’re going it alone. I can’t recommend Scott Pape enough (and no I don’t get any kickbacks from him!). In fact, I still follow his recommendations - it just saves me so much time rather than doing it all myself. For US shares I use The Motley Fool which has many excellent subscriptions depending on what service you want (I have the all-access Motley Fool One subscription).

You: I’m still not comfortable with shares. How about real estate?
Me: Sure, there’s nothing wrong with real estate!

Having a place to call home (and a base to return to from your travels) is pretty essential for your well-being. And if life doesn’t work out exactly to plan, it’s a great feeling that you have a home you can return to and not pay rent. We have our home in Australia - we didn’t go crazy and spend a fortune on it so we had a mortgage that wasn't too scary. Having a manageable mortgage means the goal of paying it off quicker is achievable. 

After you’ve got on top of your ‘home’ mortgage, then it’s probably time to look at an investment property (if you still feel uncomfortable with shares). We’ve had investment properties in the past and I still like real estate as an investment option - it’s just that I like shares a bit better! The key is to pay down your loans as quick as you can - any spare cash goes into the loans and then it becomes a snowball effect. Your income increases (from rent and salary increases) but your interest amount decreases (you’re reducing your principle). It might not happen quickly at first but a few years down the track, it really starts to kick in. This is a bit like reinvesting your dividends but instead of buying more property you’re increasing your stake (and reducing the bank’s!) in your property.

One day it will be all yours and no more repayments to the bank. Now that rental income is for you to use on travelling!

A Note On Passive Income

You’ve no doubt heard about passive income. It conjures up an illusion of just sitting back and enjoying the cash flow. Well I’m not sure if that’s really the case unless you put all your money into a fixed term deposit bank account. Even then you still have to swap it over to something else when the term is finished. Shares and property still need some attention but it’s not 9-5 and it’s not geographically dependent, i.e. you can manage remotely and they don’t take up a lot of your time. But it's still not sitting back and forgetting about them! 

To summarise:

1. Save.

2. Pick something to invest in.

3. Buy more shares and/or reduce your mortgages.

4. Continue until your ‘passive’ income is enough for you to enjoy the things you love without having to turn up to your 9-5!

Superannuation, KiwiSaver, 401K and OTHER Retirement Schemes

Depending on your age, you may want to consider adding some of your savings into a retirement scheme (superannuation as it is known in Australia). Super can be a very tax-effective way of boosting your investment returns. As everyone's situation is different, you really need to talk to a financial expert to see what would work best for you - a good accountant will be able to help you out.

It can be a rocky road...

Whether you end up investing in shares or real estate, there are going to be times where things don't work as planned. Those times can get stressful and even after all these years, it takes a lot of resolve not letting it get to us too much. You've just gotta keep in mind you're playing the long game and over time you'll have an asset that will be worth more than you paid for it and it will generate income for you (dividends or rent). Take a look at these graphs:

THERE ARE HICCUPS ALONG THE WAY BUT IN THE LONG TERM YOU'LL GET AHEAD

The caveat here is that I’m by no means a financial advisor and I haven't done any formal finance training. I’ve read a lot of books and subscribed to many newsletters over the years. This article isn’t designed to give you a financial plan - I wrote this article to show you what we do and to get you thinking about what is possible. Do your own research, subscribe to the Barefoot Investor and seek independent financial advice. 

My goal was to show you that investing doesn't have to be scary, or overly complicated, and that it's something everyone can and should be doing. Hopefully showing you how we do things dispels the myth that investing is only reserved for a select few. 

If you have any questions or would like to share your ideas, please leave a comment below!

Mick

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