Ok, so we told you how much our year away backpacking with 2 kids in SEA cost us. But how did we actually pay for it all?? We certainly didn’t win any lottery, nor did we actually save that amount of money. There were multiple factors that worked together which resulted in the actual net cost of the trip being only a fraction of that total expenditure figure.
Only a fraction?? Yup.
So how did we do it? Here’s a few things that we did during our preparation phase based on our own financial situation proceeding our departure. PLEASE NOTE: We are not financial advisors nor tax accountants and these are merely meant to give you ideas as to how you too can afford travel, without actually having to save all the money before you left!
We (ie ‘the bank’) owned our home, a modest 4 bedroom house in a suburb 40km from a major Australian city. Our mortgage was reasonable, probably considered low compared to most people. When many people decide to travel, often they feel that they must sell their home first, so that they would have that money to travel with. But this doesn’t necessarily have to be the case, and it wasn’t the right option for us, especially since we planned to return after our travels.
So we boxed up all our things, put it into storage in another part of the house, and rented the house out for 12 months. After paying the mortgage, we were lucky enough to still have a lot of the rent money left over to use as ‘income’.
While we were away, we enlisted the services of a Rental Property Manager (common in Australia), who for 7% of the rental income (and this is tax deductable), found us a suitable tenant (with reference checks), collected the rent and deposited it into our account, conducted half-yearly inspections on both the interior and exterior of the house, liaised with us by email and coordinated any maintenance works required (deducting the costs from the rent).
You can easily check how feasible an option this is through internet searches to find out what the rental income would be for a property such as yours in your area. There are many people who only want to rent for a short period such as 12 months due to either work relocations, or in our case, a tenant who wanted to ‘try’ our suburb out before committing to buying their own property.
Interest-Only Mortgage Payments
Most people have a principle-and-interest type mortgage repayment. Often though, interest-only repayments are possible. By changing our payments on our mortgage to ‘interest-only’ we were able to have more of the rental income to use as actual income after the mortgage payment was met. Sure, this meant that the principle amount isn’t actually reduced, but hey, not reducing your mortgage in a year’s time while you are traveling overseas and not working, in the ‘big picture’, is really not that big a deal. More importantly in the long-run, your property will most likely appreciate anyway, so think of it as ‘borrowing against your future’!
A line of credit is like a credit card, can be ‘unsecured’ or ‘secured’ with capital such as cash or property, but with much lower interest rates. In Australia (and Canada), you can structure your mortgage as a LOC: the bank evaluates your house and negotiates how much ‘credit’ they’ll extend you based on it. This credit then becomes your ‘credit limit’, your mortgage. If you make ‘principle’ repayments to this amount, then the amount you owe is reduced; interest is only calculated on the outstanding balance. But the beauty of structuring it this way is that you can get extra money (your equity) out from it and only pay an interest rate equivalent to that of a mortgage and not credit card rates.
For example, say the bank allows you to have a credit limit of $200,000 using your house as mortgage. But along the way, you’ve reduced it by $100,000. You are only paying interest (at the current mortgage rate) on the $100,000 yet you still have another $100,000 you can use at any time, in unlimited withdrawals (accessed through any ATM like a regular account), and you only pay interest on your daily closing balance.
You can also make interest-only repayments (which are being met with the rental income), which is fine because at the end of the day, if and when you sell your house, it will pay the balance out anyway. (Again, ‘borrowing against your own future’.)
Using Income Tax Year End’s To Your Advantage
(This information only applies to Australian and Canadians, based on our knowledge of those tax systems.)
Unwittingly we departed for our trip halfway through a financial tax year. We were both working for the first six months of it and were having income tax deducted based on the tax rate for our annual income.
But then because we were away, our income for that tax year was substantially reduced, although we still had rental income, which is also taxable (but after expenses are deducted of course).
The thing about income tax is that you are taxed on your pay based on your annual income projection. If you don’t adjust that projection at start of the tax year preceding your departure overseas, then you will be deemed to have paid too much tax and a tax refund would most likely be due to you once you file your return.
Ditto for the tax year following your return home. If you are only working a portion of that tax year, then you may also see a refund if you are paying the tax rate based on your annual income.
So departing mid-way through a tax year ended up working in our favour with a nice tax refund after we got back to reduce the outstanding balance on our LOC.
These were some of the ways we were able to substantially reduce the actual cost of our year way without working at all or selling our home. And again, these were things that worked for us, based on our financial situation and our ability to tap into the rental market. We know that many people cannot make these ‘angles’ work for them.
But the point is that perhaps consulting an accountant and/or lender while you are in the ‘dreaming phase’ might help you ‘find money’ where you thought previously none existed so that you can travel the world with your family. But of course, winning a lottery would be the ultimate solution!