What renters can practically do to improve their finances
In the first part of this series, we examined the mindset problem that can plague renters: fear of financial failure that comes with not owning your own home.
It’s well accepted that renting rather than owning your home is regarded as a sign of financial struggle, even if it’s not true.
That perception can act as a deterrent to creating financial freedom let alone becoming financially independent.
You can read our suggestions for overcoming that mindset in the first part of this series here.
That is an important first step towards overcoming the perceived hurdle of renting in achieving financial freedom.
A foundation of financial freedom
Being able to save more than we spend is a common-sense foundation in finding financial freedom and it should never be ignored.
A renter’s belief that their rent payments make savings impossible is extremely damaging to this fundamental step.
The reality is that a renter should – so long as they are paying an appropriate level of rent – have the ability to increase savings beyond that of a homeowner.
A homeowner has to pay rates, insurance and factor in repairs and maintenance.
Also, a mortgage will often be higher than rent from a repayment point of view.
“The renter should be trying to get into the mindset that this cashflow difference or saving for them should be put away for savings,” says Hamish Ferguson, a director of Vision Property and Finance.
A basic example is that an $800,000 established home that is more than 10 years old could have up to $8,000 per annum needing to be allowed for in expenses and possibly another $4,000 per year in the difference between rent and mortgage repayments.
That is $1,000 per month that the average renter could put towards savings or some sort of investment, he argues.
Paying the right amount of rent
So long as a renter’s rent payments are set at an accurate level of their income they should have more freedom to grow personal wealth in a way that they may not actually recognise or realize.
What if your rent actually doesn’t allow you to save?
The widely-accepted guideline is the 30 per cent rule, which recommends that you don’t more than 30 per cent of your gross income on renting a home.
It’s not an exact guideline and in an expensive capital city, it can be hard to stick to. But you shouldn’t be way over that. If you’re spending 40 per cent or more of your gross income on rent, you may be renting beyond your means.
That means if you earn $1,500 a week before tax, you’d be unwise to pay much more than $450 rent per week. Doing this is called placing yourself in ‘rental stress’.
This brings up another huge advantage of renting over home ownership: the ability to move somewhere cheaper quickly.
If a renter falls on hard times or realises they are paying too much rent, they can move to a lower cost property. It is much more challenging for a home owner to do this.
Renters sometimes have more freedom to negotiate in a contract than they realise too.
“Depending on the market it is possible to negotiate if rents are falling,” Mr Ferguson says.
“As home ownership in Australia is slowly declining and the government is conscious of reducing the benefits for property investors, this is not that common.”
What is more common, he says, is if the renter is thinking of moving due to cost increases they can:
- sign longer-term leases to try and reduce the effect of rental increases
- if they look after the property well, the owner is less likely to want to lose the tenant. This increases their bargaining power
- Sometimes for small increases or if they are a good tenant they can encourage the landlord to improve the property. This might mean getting an air conditioner, putting in a new oven or dishwasher or other small improvements.
Those small wins earned from being a reliable tenant can be translated into financial benefits.
Another thing renters can do to save money is legally sub-let a room.
They are allowed to do this however they do need to seek permission from the landlord. Most leases will specify how many people will be occupying the property.
What else can a renter do to improve their financial position?
There has always been active debate around home ownership and whether the renter can achieve the same position as a homeowner.
If the same level of discipline is held between a homeowner and renter, the same level of wealth can be achieved if the income levels are the same.
Often but not always, it is harder for the renter as it is hard to create the right level of discipline around their finances so that the right level of money is put away for long term investing.
Here are some other ideas to help renters save money and improve their financial position:
- Improve your financial literacy;
- Face your debts and start reducing them;
- Have good regular habits with regular bills, i.e. set aside money for bills (i.e. car registration, pet bills) and ‘unexpected’ expenses;
- Do a budget and maintain it;
- Introduce some realistic financial goals;
- Introduce a mindful approach to managing your money;
- Address and/or eliminate damaging financial behaviours such as compulsive spending and gambling;
- Reduce discretionary spending i.e. eating out;
- Cut energy costs i.e. ditch the second fridge, heat/cool one room at a time, dry clothes outside instead of using a dryer;
- Live close to work to save money on transport;
- Sell unwanted items;
- Pay your rent on time – having a good relationship with your landlord is worth money; and
- Have a plan for investing