36 - On Goals

I scared myself silly when we signed up for our first mortgage in 2006 to buy a block of land and cover the ensuing house construction. That mountain of debt looked insurmountable and, considering the higher interest rates at the time, the repayments felt like an invisible shackle binding us to the daily grind of working life. The system had us by the balls and would continue to hold on for the next thirty years—according to the bank’s timeline.

This mortgage was, in many ways, a necessity (of modern life, anyway) as it would fund the establishment of our family home and promote us from the status of mere tenants. As projected, we now have two young children and are proceeding to raise them in the house we built.

In the years preceding the build we rented, paying what felt like dead money to our landlords—around $125/week or so. After repaying a student loan to my mom and moving to Perth we had very little money to our names, despite the fact I’d been working full-time as a professional for two years. My infamous frugality comes to me honestly after several years of having to live on the cheap!

On deciding to buy the block, the savings we had put aside for a deposit were all but spent by the time the deposit (we borrowed 95%, from memory) and stamp duty were paid and then we had that fun little surprise of lender’s mortgage insurance to deal with.

It was around this time I casually voiced my apprehensions about all of this to a work colleague (the CIO where I was working at the time, Colin Macdonald). His simple advice to me—which I would readily pass on to anyone else in a similar position—was to repay the loan as quickly as possible.

The bank had us down for thirty years. Colin’s advice was to clear the loan in ten years.

Say what now?!

I broke out a spreadsheet and projected some numbers forward in time. At best, I thought we might be able to repay the principal amount by 2018 (so ten or eleven years). I played with the bank calculators and quickly realised we could save the value of the property itself in interest costs—hundreds of thousands of dollars—by making extra repayments. I was intrigued.

We had a basic home loan at the time with no offset facility. The bank did include a free redraw facility with this product, however. With the redraw setup, we could manually (electronically) transfer our savings into the mortgage and therefore save the associated interest costs that would otherwise be charged on that amount. Better yet, the redraw funds were fluid, meaning we could redraw, on demand, some or all of funds we put in if we needed that money (in an emergency, to fund a car purchase, for a holiday, or for any reason).

There is one caveat to note with redraw, which I only learned about more recently: the ATO considers funds contributed to redraw to have contributed to paying down the original debt. In brief, if you think you might rent out your property in the future, you’ll only be able to tax deduct costs associated with the loan amount you haven’t yet repaid (even if you redraw the surplus funds). Offset accounts may attract a small fee but are immune from the ATO, work in the same way as redraw, and are more convenient.

And so we set ourselves a goal, which would later become our very basic financial strategy: put it all into redraw. Rather than making interest at whatever low interest rate the bank would offer, we save the interest the bank would charge for some of the mortgage amount (whatever we could put in).

With me working as a contractor and the wife working long hours in a good job (that doesn’t pay terribly well) we continued to live as we had: simply. We didn’t spend excessively—we didn’t often have the opportunity to do so with the wife working 60-80 hours a week. Entertainment costs were out!

Instead of keeping our savings in a regular bank account, we kept them in the redraw account.

Slowly but surely the extra contributions started to add up with the added benefit of reversing the huge impact of compounding interest fees the bank would have otherwise been charging us. The Albert Einstein quote says it all: “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

But today’s post isn’t about compound interest, it’s about goals—specifically the huge goal we set out to achieve nine or so years ago.

Admittedly I’ve been a little distracted by being back to work and the kids and I’d neglected for some time to update my spreadsheet that tracks the balance of our home mortgage and the offset account we now employ in place of redraw. I updated this spreadsheet recently and noticed what I first thought was an anomaly in the data: the negative amount highlighted red I normally show for the balance of our home loan minus the offset balance was no longer negative and it was no longer red: it was black and it was positive. The balance in our redraw account was more than what was owing on the mortgage.

I do keep an eye on our monthly repayments so I knew before this point we were heading in the right direction. In the last six months the monthly interest charge had plummeted steadily from a couple of hundred dollars to less than $10.00.

It then dawned on me: we’d met our goal. We’d met our goal a year early. Although the mortgage account was still open (and will remain so for a couple of specific reasons), we effectively have the option to repay the mortgage balance in full, if and when we choose to do so.

Back in 2006, this milestone was equivalent in my mind to being financially free. Today that’s not quite the case as our commitments—financial and life-related—have increased and of course there is a cost of living in groceries, petrol, clothing, and so on. I can say achieving this goal feels as good as I hoped it would back in 2006—perhaps all the more so because I neglected to watch as the odometer tick over.

This post is isn’t to boast, it’s to celebrate and inspire. From a very low base, ten years of hard work and time has allowed us to meet our single financial goal. Your goal(s) might be different depending on your circumstances: your timeline to repay your mortgage, depending on the value of your mortgage and your income, might be the same or it might be a shorter timeframe or a longer timeframe. You may also favour a better balance in life than what we’ve managed to achieve (I believe strongly in delayed gratification but I’m also nearing forty…). Nonetheless, set a goal and then plan to achieve it. The world can then be yours.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

13 – Life Insurance

As part of a review of all matters financial I initiated in the middle of 2014, one of the items I added to my list of things to mull over was life insurance. The matter surfaced for me when I realised I no longer had any insurance cover through my superannuation fund by virtue of not working (i.e. being a stay-at-home parent) and not contributing regularly to my super account.

I’m not planning to die or be critically injured any time soon but I remember when we took on the mortgage for our PPOR in 2006: the commitment felt almost too large handle. I used to commute into the city regularly by bicycle but, having recently moved to Perth from Adelaide—with a related increase in minor accidents, and as one of two income earners critical to our ability to repay the mortgage, I felt it was time to stop riding. With a few years of wisdom on my side, I don’t feel the same way this time around with the investment property but, conversely, I now have kids and want more than ever to protect my family from the risk of loosing an income/resource.

From personal experience again, my father died at the age of 56 and my grandfather at 65 so I joke that I’ll likely expire at 45. Specifically, my father had a life insurance policy worth $500k when he died and had only recently opted not to increase that policy to $1m. The $500k has served my mom well over the years as she retired and downsized the family home but she also weathered the 2001 tech bubble and then the GFC with most of that money in the stock market. With the payout she’s been comfortable; without it, I don’t know that her retirement years would have been as amenable as she was expecting had my dad lived to retire with her.

When we were working, my wife and I both had automatic life and salary continuance insurance (SCI) (also called income protection) through our super funds. We didn’t pay directly for these policies but they were funded through the fees we pay to each fund (a percentage of our super balances). Notably, the amounts insured were very small—a couple of hundred thousand each for life and SCI.

We had the option, of course, to increase the benefit amounts and do everything through super but I soon came to learn there is a better way—an approach that not only pays for some of the premiums from our otherwise inaccessible (preserved) super balances (we’re not running SMSFs) but also offers tax benefits.

By way of background, I’d scheduled a complimentary meeting with a financial advisor through our accountants at WSC Group (through Jigsaw Financial Planning—again no affiliation here). I took with me our written financial goals and described to Matthew Laird (the advisor) what we’re doing with real estate, where we are with super, and that I’m not looking at stocks or mutual funds. It soon became apparent we didn’t need much in terms of paid financial advice… yet. We did, however, talk about insurance and Matt promised to get some numbers together for us. Importantly, he highlighted the concept of a partial rollover from our super funds to pay some of the premium costs, reducing our out-of-pocket expenses and thereby removing what had been the single biggest blocker, to my mind, to insuring ourselves adequately: cost.

The first thing Matt’s team did was prepare a Personal Protection Plan document for us which summarised our current position in terms of income, assets, expenses, liabilities, goals, and existing insurance. This offered a framework for understanding our insurance shortfall and potential requirements into which the planner injects their recommendations for level of cover and ownership structure. There was no charge for this.

It’s worth quickly describing the different types of insurance because I found this enormously confusing at first. I like to categorise insurance into two simple groups: living benefit, which you receive if you’re not dead, and death benefit, which your estate or nominated beneficiary receives when you die.

Living Benefit

• Total or Permanent Disability (TPD). A lump sum payout when you’re declared totally and permanently disabled—and can’t work. These policies might exclude heart attack, stroke, cancer and others. A very important distinction to be aware of between TPD policies is that of “Any Occupation” versus “Own Occupation”: with an Own Occupation policy, you’ll receive a payout if you can’t work in your own profession; with an Any Occupation you’ll only receive a payout if you can’t work in any occupation (as Matt says, “as long as you can lick stamps…”). The premium is not tax deductible and the payout is typically not taxed.
• Trauma (also called Critical Illness or Living). A lump sum payout that covers heart attack, stroke, cancer, and other specific conditions. The sum insured is typically lower and this cover overlaps somewhat with income protection. The premium is not tax deductible and the payout is typically not taxed. For us, I felt this was very much an optional insurance given our SCI cover (see below) and we didn’t buy any trauma.
• Salary Continuance (SCI) (also called Income Protection). Pays ~75% of your income on an on-going basis, after a waiting period, to the age of 65 if you can’t work. SCI covers heart attack, stroke, cancer, etc. The premium is tax deductible and can be paid through super but I’m told it’s best to pay this one yourself for maximum tax benefits. The benefit is classed as taxable income. With the wife’s insurer, the maximum monthly benefit they’ll underwrite is based on 75% of her highest income year in the last three years.

Death Benefit

• Term Life. A lump sum payout at death or when you are declared terminally ill (i.e. before you die but with less than 12 months to live). You’ll likely purchase “term” life insurance, in which your premiums cover you for death up to a certain age. You might also be able to purchase permanent life insurance, although I’m not sure this is available in Australia. The premium is not tax deductible and the payout is typically not taxed (but it may be if paid via a super fund or if paid to someone who isn’t a financial dependent—i.e. not your spouse or children).

Note that life insurance tends to get more expensive the older you get—I suppose because you’re more likely, statistically, to receive a payout. I was specifically told by Matt insurance gets a lot more expensive past the age of 47.

The other problem you might face the older you are relates to your medical history. In my (young) case, I broke my back in a snowboarding accident at the age of 21. So my insurance policy includes a blanket exclusion on spinal cover—with no reduction in premium, of course. Basically if my back suddenly gives way tomorrow I’m not covered but if I’m in a car accident and break my back I would be covered. Of course, some insurers may offer you a policy with increased premiums to cover the additional risk. My suggestion therefore is to get yourself insured as soon as you can, as a young person, so you at least have something in place even if health problems do present as you get older which might preclude you from becoming insured.

In the same vein, you’ll also want to be careful what you tell your GP—and what they record in your patient file (the insurer will request your patient file from your GP as part of the assessment process). One thing in particular to be mindful of is mental health—depression, anxiety, etc. If you’re having a bad week at work and mention that when you visit your GP for an unrelated reason—and let’s say your GP recommends you see a counsellor, the insurer may take that into consideration when assessing your application.

With some insurance products like SCI you can insure at indemnity value or agreed value. Indemnity value means the benefit is paid as a percentage of your earnings (i.e. 75%) whereas agreed value means your benefit is whatever fixed amount the insurer has agreed to cover.

Your premiums will also increase annually (these are called “stepped” premiums)—beyond the rate of inflation. You may have the option to pay a higher, “levelled” premium that remains constant throughout the course of your policy. If you can afford to, a levelled premium seems like the way to go to me—assuming premiums will increase beyond the levelled premium and you’ll save money. That said, part of me thinks “the house always wins”.

Our risk of death increase as we age but we conversely approach the end of our careers and our income generating potential. In other words, we should theoretically have a lessened need for insurance as we get older. My aim therefore is to wind back insurance over the next twenty years, with the assumption that we’ll be further progressed in our financial lives and less dependent on income or a large payout to set us in good stead. I’ve therefore opted for stepped premiums.

With other products you can purchase a lower-cost “rider” policy. For example, if you have a trauma rider to your life policy and claim against the trauma policy, your life policy benefit will be reduced by the amount you claim for trauma.

With the concepts out of the way, we started by defining our insurance goals, i.e. what costs would need to be paid for if one or both of us could no longer work. With my wife as the only income earner, we would firstly want to reduce debt and replace her income. With me providing child care, we would also want to cover the cost of child care if I couldn’t provide that function. Pretty simple. Anything else is a bonus—i.e. paying down property debt. In short, we calculated benefits from income, factoring in living expenses and debt. As with most things we do, we insured for modest amounts. Since income protection would be paid at 75%, I opted to go for the maximum amount we could purchase however.

From there, we were able to structure the insurance so the premiums are partly held through a superannuation account. This is accomplished through a partial rollover from our own super funds to the insurer’s zero-balance fund for the amount of the annual premium. In other words, that percentage of the premium for the policy held in the super fund is paid with super dollars that I otherwise cannot touch until I reach preservation age or retire. Yes, that money is no longer earning money for me in my super account but at least I’m not having to pay out of pocket for something as mundane as insurance (and in all honesty I consider the balance of my super as dead money… I’ll look at an SMSF one day).

In my particular case since I’m not working, I wasn’t eligible for an Own Occupation policy or SCI and all of my premiums were covered by the partial rollover. My policy covers me for life and TPD.

In the wife’s case—interestingly—the advisor recommended a different insurer and she’s covered for life, TPD, and SCI. Premiums are again paid through a combination of a partial rollover and a personal contribution. Interestingly, dear wife is with an untaxed super fund so there’s the little catch that rolling over from an untaxed fund to a taxed fund will likely result in tax being payable on the rolled over amount. This is still being resolved but it sounds like a tweak to the ownership structure will sort it out.

Finally, I should mention buying this insurance didn’t cost us anything in broker fees. The broker received a commission from the insurer which is detailed to us. I didn’t think insurance was sold this way so that was a nice cost savings and, since I know nothing about these types of insurance companies, saved me a lot of research. Yes, brokers are selling products that make them a commission which may vary from product to product but WSC Group (through their subsidiary Jigsaw Financial Planning) seemed very professional and above board in their dealings with us.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

6 – Think Rich

Immediately after writing my last post “How to Spend Money”—in which I advocate being frugal and not spending money unnecessarily, a library book I’d reserved came available: Robert Kyosaki’s Rich Dad’s Guide to Investing. The first section of this book is almost entirely dedicated to the concept of retraining and refocusing your mind to think like the rich do. In other words, instead of pinching pennies as part of a frame of reference where money is scare, change your mindset to one in which money is abundant and don’t be cheap.

This makes a lot of sense to me. I won’t make a full about-face in follow up to “How to Spend Money” but am inclined to adjust my thinking somewhat. The standard disclaimer I include with every blog post includes a note that I’m learning too, so here’s direct evidence of that! Most importantly, I’m learning and have a very open mind on financial matters as I’m not yet prejudiced by a lot of experience; I’m therefore willing to adapt and adjust my thinking on the fly and explore new ideas and concepts like this one.

A note: I realise this post isn’t directly related to property investment but—for me—property investment is simply a means (a “vehicle” in rich dad speak) to wealth.

Although I’ve not necessarily been cheap, I’ve definitely been frugal often and modesty always has been—and always will be—a pillar of what it means to be me.

Rich dad wisdom suggests being frugal is okay but there’s no sense in being rich but living poor. As an extension to that, it’s worth pointing out another Rich Dad pearl, which suggests having a low income and high expenses is superior to the traditional goal of having a high income and low expenses. In other words, use good expenses to reduce your taxable income (and to tie that back to our current discussion: don’t be cheap by trying to keep your expenses low). I’ll add this book is by far the best of the three Rich Dad, Poor Dad books I’ve read to date—it’s very conceptual but so worth the read—see the Amazon.com link above to check it out.

Frugality I would define as choosing to not be extravagant in your daily spending habits (for me this also relates directly to my greenie sensibilities: I choose not to be a consumer and pollute my environment with unnecessary packaging and products). I always prefer to buy quality and do not buy to throw away—this is and always will be a way of life for me. If I were cheap, I would buy poorly made, disposable things in quantity—at the very least.

To quote from Kiyoaski’s book: “My rich dad would say, ‘There are two ways to become rich. One way is to earn more. The other way is to desire less. The problem is that most people are not good with either way.’ […] this book [is] about how you can earn more so you can desire more.”

I’ve not been too bad on the desiring less front but I do look at people around me who seem content spending a lot of money and wish I could be less frugal, if not less cheap! I certainly want to be more generous and focus the money I must spend on the positive aspects of life.

Kiyosaki also cites another article on this subject which suggests the wealth you can build by living as though you were poor is finite (the article cited also discusses penny pinching in the context of becoming not just a “millionaire” but a “multimillionaire”).

The book doesn’t offer much in terms of definition between frugality and cheapness but the author does leave us with another rich dad quote: “‘If you want to be really rich, you need to know when to be frugal and when to be a spendthrift. The problem is that too many people know how to be cheap only.’” I think this point also extends beyond the black and white argument of frugality versus cheapness and into the broader educational context of the investor: do we understand the difference between good debt and bad debt, good expenses and bad expenses, assets versus liabilities, taxation laws, ownership structures, etc, etc? In other words, are we being constantly cheap or are we being selectively cheap? I mentioned in the previous post not spending money on a depreciating asset like a car; that’s not frugality but rather understanding how not to waste money quickly.

Notably, Kiyosaki goes on to write (later in the book) that rich dad focused on delayed gratification in the short term in favour of a long-term reward. I think this is key and really at the crux of what I was suggesting in my earlier post. Nonetheless, I do believe in the power of setting goals and ‘thinking yourself’ into the reality you desire. 

As a final thought, I’ll suggest not being cheap doesn’t mean splashing out at every opportunity. Meanwhile, keep thinking rich!

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

5 - How to Spend Money

This is simple but for so many people the concept is something from the stratosphere. My rules are as follows:

1. Don’t spend money
2. Use other people’s money (a mortgage to buy property, interest free periods on a credit card) when you have to spend money
3. Build your credit history (if you’re new to borrowing)

Let me explain in a bit more detail…

1. Don’t Spend Money

This is really the golden rule. Some people might choose to read this as “don’t spend money you don’t have” but see Rule #2 before you adopt that approach. But there’s no need to interpret the wording at all: just don’t spend money!

Although simple in theory, this is extremely difficult for many people to implement in practice. We’re used to spending money and our culture conditions us to spend more money than we need through marketing and advertising and by watching our friends and families succeed. Break the habit, become wealthier, spare the planet the extra plastic, and change the world, maaaaan!!! Ignore the adverts and recognise and accept your friends might be earning more money than you are/in a different financial situation to yours/stupider than you are. Spending money is not a measure of success or intelligence.

If you don’t need something, don’t buy it. Live frugally, is what I always say (rather than calling myself cheap!). Don’t live in the moment and buy impulsively. The time for spending money will come but right now you need to accumulate money and wealth and the easiest way to do this is via the magical effects of compounding, a subject on which I’ll write more about in detail another day. For now, just understand the less money you throw away, the more money you’ll have to make more money.

Before you whip our your credit card, stop and think whether what you’re about to buy is going to increase the number of days (or months or years) you’re going to have a mortgage to repay—or increase the time it’s going to take to save up a deposit for a first home loan. Ask yourself if this doodad, that beer, this seemingly insignificant expenditure is really necessary to your wellbeing and fulfilment. Can it wait another month? Another year? I remember when I first reviewed the interest costs on our PPOR mortgage: over the thirty year term, we would ultimately end up paying the bank the value of our home again. The quicker we could repay the principal, the less we’d pay on interest.

The best way not to spend money is to understand what you need to spend to survive (i.e. a plan or budget—anything), spend that amount and record the transactions against your plan or budget, and treat  yourself occasionally but in moderation.

There are also many subtleties at play here. Never spend money on a depreciating asset like a car—i.e. don’t buy cars, at least not new ones, until you can genuinely afford to. Don’t buy an ultra HD curved OLED television. Don’t waste food. If you’re spending more than $50 a month on booze, you’re spending too much. Definitely don’t smoke or quit if you do. Take it easy on the holidays. Don’t eat out too much.

There are also some really easy things you can do. Buy store brand ketchup instead of Heinz ketchup. Mow your own lawn. Change your behaviours by wearing your clothes for a second season instead of refreshing your wardrobe every three months. Use grocery store fuel vouchers to save on petrol. Pay your bills on time to avoid fees. Ensure you’re never in a position where you have to pay late payment fees or, worse, credit card interest. Make your lunch and take it to work instead of buying lunch every day. Cancel your cable TV subscription. Become a vegetarian and stop eating meat. Ride a bike to work instead of catching the bus or train (or worse, driving your car and paying for parking). As you start thinking like this, you find all sorts of ways to save a few dollars and as my mom always said: “every penny counts!”

Keep the achievement of your long-term goals front of mind and what you give up today is easier to bear. We took on a $700k+ mortgage in 2006; it’s all but paid off less than ten years later through moderate (minimal, really) spending and careful saving.

Edit: Please read my follow up post “Think Rich”—it explores a valid counterpoint to this concept.

2. Use Other People’s Money

If you insist on spending money, don’t use your money, use someone else’s money—at least for as long as you can and if you can do so for free.

Credit cards are considered intrinsically evil by some people but if these facilities are not abused they can be used to your advantage. As long as your balance owing is paid by the due date—that is, you have the cash flow to afford what you’ve purchased—you won’t have any interest to pay for the privilege of borrowing that amount for up to sixty days.

We buy everything (EVERYTHING—except purchases that attract a fee) on a single credit card with a reasonable limit and we pay the credit card bill on time. Our typical credit card bills run between $2,000 and $3,000 (more around Christmas, sometimes less after a really good month); instead of being paid for immediately from our cash, the value of our monthly spend is being lent to us at no charge by the credit card company. During that interest free period, that lent money is working for us in our offset account—reducing the amount on which mortgage interest is charged.

The added bonus is having the majority of our transactions centralised on one card, which makes it easy to know how much we’re spending month to month; it’s also easy to spot any problems. I typically pay off the credit card, in full, a day or two before it’s due to maximise the credit benefit.

The key takeaway here is to never pay interest on your credit card. Most cards will charge interest at an annual rate of around 20%. This adds up to lot of money—I’m always astounded how my credit card statement tells me if I only pay the minimum amount I’ll pay off the closing balance in “58 years and 07 months” and “end up paying an estimated total interest charge of $22,828”! That’s crazy talk.

If you get stuck with credit card debt, plan on getting rid of that debt first before anything else because it will most likely be the highest interest rate you’re faced with (apart from a bad car loan, perhaps). Call your credit card company and have a chat with them about a repayment plan or an interest-free period—ask to speak to the manager if necessary. If your card company won’t help—and by help I mean be very generous to you—roll over the balance on the card to a new card with a 0% introductory balance for 12 months or whatever period you can find. Hopefully that will give you enough time to clear the debt without the interest burden accumulating on top of the original amount.

Finally, I don’t use cards that incur an annual fee just for the sake of a few perks.

When it comes to your home loan, you also need to be careful. If you have a number of debts (i.e. a car loan, credit card, personal loan, etc) you may be offered the option of consolidating all those loans into your home loan. The benefit of doing so is a better interest rate: instead of a 20% rate for your card debt, you’ll be paying 5% at today’s rates. The downside is that debt will follow you for the term of your home loan, meaning the interest on the amount you’ve consolidated will compound every year until it’s repaid—along with x number of years of interest. You could end up paying off that new car for thirty years—long after the car is gone!

You might similarly be tempted to refinance your home to free up equity for a holiday or a new toy (boat?) or a swimming pool. This is easily done but, again, be mindful that in doing so you’re hiding the true cost and using money you can’t really afford.

Credit cards and home loans are generally considered “bad debt” because it’s money that doesn’t work for you. Consider the alternative: “good debt”. This is money borrowed that you in turn use to make money through investing in real estate, a business, or stocks. In contrast to the loan on your PPOR which will cost you money on interest (this interest cannot be claimed as a tax deduction), a investment property mortgage will serve to earn you money. So as a footnote to this section, if you’re buying an investment property, use the bank’s money—secured by the equity in your home—instead of putting down your cash that can be better used elsewhere.

A student loan like a HECS debt is also someone else’s money. If you have the option to reduce interest by making early repayments, ask yourself if the cost of holding onto that loan and not making early repayments will allow you to use that money more productively elsewhere. How much will you save by making early repayments? How much do you stand to make by investing the value of those repayments elsewhere (e.g. in an offset transaction account, saving you interest of say 5% at today’s rates on your PPOR mortgage)?

3. Build your Credit History

If you’re new to property and are looking to take on your first home loan in the next twelve months or so you’re probably also saving for a deposit and implementing a lot of the tips I’ve offered above—good on you. The next step is to ensure you have some form of credit history for lenders to look at when assessing your eventual loan application. To carry on from Rule #2, the easiest way to build your credit history is to take on a single credit card, use it, and ensure it’s paid off in full by the due date. This will help identify you as a borrower with a proven track record of debt repayment—through both intention and financial means.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

2 - Choose to Live Well

New Year’s Eve approaches and I’m feeling reflective—on the year that was and the year to come. Specifically, I’m thinking a great deal about what it means to be happy, free, and self-sustaining. I look to my family for these things as they make me happy and help me (us) to be free and, eventually, self-sustaining.

As a stay-at-home dad, I made a conscious decision to put aside, if not discard, my career in IT and take on a role unfamiliar to many men. I handed financial control—at least the income generating aspects—to my wife. Rather than being the member of our family with the highest income, my raw financial contribution in dollars and cents become zero and I spend my days wiping bums and playing house. In short, as Robert Kiyosaki might say, I stopped doing what I can do best: making money as an employee.

Has this hurt us, financially? Not really. Not yet. Not in the short term. Fortunately my wife makes a decent income on her own and this year has been financially productive with her working rurally for six months. I’m not contributing to my superannuation, of course. Had I been working, most of my income would have been put towards paying down the mortgage on our family home. These are important things to think about, particularly in regards to our future financial position and our ability to retire comfortably. My time as a productive employee is limited, after all.

Do we live any less well than than we did when we both worked? No. We’ve always lived frugally. Realistically we’ve been a single family income for a while now as my wife had twelve months off when our first child was born (only a fourth months of which, roughly, was paid). We’ve become accustomed to tightly managing our available funds and resources and while we don’t scrimp and pinch pennies as much as we once did, we by no means lead a lavish lifestyle today.

We’ve essentially chosen to live well.

Our daughter would have had to go to day care, full-time, from the age of one, if I had opted to continue working. Or my wife would have had to put on hold many, many years of education and training in the medical field to stay at home (part-time work is not a real option for her today). Sure, we could have bought some more furniture and some overhead cabinets for the kitchen and maybe another big machine for my woodworking shop but all of those things can wait. In general our long-term lifestyle goals are not much different than our reality today: no flashy cars, no big house, no designer clothes; we appreciate the simple things in life.

A second income would also make us more appealing to the banks in terms of investment loans but I know what we can and cannot afford in terms of debt service so I’ll take my business to the lender who best understands that. Notably, securing funding for this first investment property has not been a problem, primarily because of the equity in our PPOR.

I’m also somewhat fatalistic and I know I won’t live forever. I’m not living it up today, in my thirties, to counterbalance that eventuality, but I despise the idea of working myself to the bone, slumped over a desk day in and day out while life and reality pass me by. My wife would like to work part-time one day in the future (when it will be easier for her to do so) and I genuinely hope she can. She does have a significant contribution to offer society as a doctor but there’s no denying the past ten years of training has been gruesome and taken a toll on our family life.

This is the reason why I’ve opted to invest in residential property. It’s the hope of achieving financial freedom, at relatively low risk, and the promise—however distant—of making a passive income legitimately. An empire of appreciating land, buttressed by the houses on that land generating income so I don’t have to, is, for me, the pinnacle of financial success and personal financial security. There are complexities. There will be hard times ahead. There are also simplicities and there will be good times ahead too.

I spent a significant amount of time this year preparing mentally, through knowledge-building, to start executing a multi-year (multi-decade) investment strategy focused exclusively on residential property. I have minimal experience in this area. There is no doubt I will make mistakes but in pushing forward I gain experience and ultimately reduce and remove risk. As a stay-at-home dad I had a bit of spare time (not much though!) to fast-track my property investment education and I’m reliant on a number of companies to help me stay on track. I like to think I’m not idle at home (beyond the twelve-hour days running the house, that is) and that I’m contributing—financially—to my family’s long-term success and our future ability to live well.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. I'm learning too and expect to make many, many mistakes along the way.

Happy new year,

Michael

The Players

Continuing from my introductory post, there's us. Who are we? I've already mentioned I'm not an accountant or a financial planner.

Me. I'm a stay at home dad, full-time. I earn nothing. I receive no Centrelink or other government benefits. I do not work part-time. I'm a stay at home dad 24 x 7 x 365, with no sick days, no real holidays--not even public holiday off, and I can't even steal stationary. I built a career in IT, working in and out of the private and public sectors for many years although I consider myself predominantly a contractor—i.e. a body for hire. The stay at home dad seed was planted very early in my career and I worked professionally for about ten years from the age of 24 before "retiring". I was earning a very healthy bit of cash before giving away my career and we've sustained a hit without that money coming in. With my wife working more than full-time this arrangement was better for us than having a young child in day care and that child has thrived. I originate from Canada but immigrated to Australia as a young man to live with my new wife and we've been married for ages now.

The missus. She is to be henceforth referred to as “dear wife” or the equivalent. She's a paediatric registrar so basically a trainee doctor (a senior trainee, mind you). So also basically a grunt—or at least she has been. The residents and registrars do all of the night shifts and the weekends and the public holidays and Christmas. If you or your kids have ever considered studying medicine, I'd say don't waste your time. The wife studied at university for six years or so and now, in her mid-thirties, she's nearly finished her formal training. Did I mention the pay is uninspiring? It is. This is a government position, essentially—and it's contract-based so essentially she's a top-tier professional who's had to put up with poor working conditions (public hospital), horrendous hours, low pay, and little real job security for about ten years. My wife is also a very good doctor, not only smart and efficient but a good communicator too.

I should say here don’t let the doctoring thing put you off. Doctor-schmocktor. Our single income is likely less than that of your typical dual-income Perth family and if you flip through a publication like Australian Property Investor you’ll see many single men and women on modest incomes achieving extraordinary things in property. Yes, my wife is a doctor but read on and you’ll see how we actually live—the workload I mention above should offer an idea. If you have a bit of money to your name or, better yet, equity in your current home, there’s so much you can do. My wife could be a plumber and me a bum and it wouldn’t make a great difference.

The Kid. She's two and half. Popped out a while ago and is starting to become expensive. It's not any single one thing but, for example, I recently tallied up the cost of our swimming lessons over a one year period and it was $700 or $800. Then there's nappies, clothes, food, toys, books, furniture, baby gym, petrol to and from activities, medication, and other medical costs. For a little person who suckled her mother until the age of two it's amazing how much money she soaks up. Good thing she's loveable and cute. We’ve got another one on the way.

Lifestyle. I'll write more about this in future posts but I include it here as a summary of who we are as a family. Essentially we started our lives together having to scrimp and save with very little financial support from our parents and we continue to live and breathe that ethos today. We spend rarely and when we do it's with hesitance and consideration. We do not live lavishly. We do not drive fancy cars (we were a single car family until this year). We don't holiday abroad apart for the very occasional trip home to Canada. We dine out occasionally. We don't drink much. Don't smoke. Don't eat meat—we're vegetarians, actually. I bought our first big flat panel TV on Gumtree used for $150 and it was only a 42 incher. Some of the furniture in our house was handed down from my wife’s parents and until this year we still had the old purple microfibre couch her brother gave us when we moved back to Perth… his dogs had slept on it prior to that and Charlotte spewed all over it while breastfeeding so it was finally due for replacement. In other words, we save—again, I'll explain how later.

In a nutshell, that's us. I’ll no doubt expand on the above in future posts.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,
Michael