Aussie Firebug

Financial Independence Retire Early

Podcast – Investment Bonds – GenLife

Podcast – Investment Bonds – GenLife

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Summary

Have you ever heard of an investment/insurance bond?

I probably did somewhere along the journey and most likely disregarded them as soon as I heard the word ‘bond’. But don’t be fooled by the name (like I was), there are a lot of advantages that these investments offer and in my opinion, are the best way to invest for children (your own or others).

But it doesn’t stop there. Investment bond can offer a legitimate tax effective alternative to the traditional ETF/LIC route that most Aussies adopt in the pursuit towards FIRE.

There are a few specific rules that need to be followed

In today’s episode, I chat to Catherine Van Deer Veen who is the CEO of Generation Life, an Australian investment and insurance company that’s been around for 15 years currently managing 1.3 Billion dollars for investors.

If you’re thinking about investing for your kids, nieces or nephews or are looking for a tax-efficient alternative investment product, this is the podcast for you!

In this episode, we talk about:

  • What exactly is an Investment Bond
  • What Generation Life can offer to investors
  • The specific rules that you must follow in order to reap the full tax benefits

and much more

 

Show Notes

Ask Firebug Fridays 13

Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.

 

 

Question (3:10)


Hi AFB,

First of all, love your work and Ask Firebug Fridays episodes. So thank you.

I understand your stance on Super as you cannot access any of it until you’re in your 60s, however as potential a first home buyer, I cannot help to consider First home super saver scheme where you can access up to 30k of the pre-tax (salary sacrificed) voluntary contributions you’ve made.

To me, it sounds like a no brainier but please let me know if this sounds like a good deal from the Government from your end or if I am missing anything that may cause me to reconsider.

Thanks,

-Derek

Firebug’s Answer


Hi Dereck,

The FHSSS (woah that’s an ugly acronym) is a great way to save for your first deposit.
My only concern would be that you make sure you check with your employer that your salary sacrifice does not contribute to their Super guarantee. Technically if you SS it can be counted towards the super guarantee and means that your employer doesn’t have to contribute as much. Check this out
Assuming that’s all sweet, just make sure you understand all the obligations and checks you need to get the money out when you need it 👌

-AFB

 

Question (8:54)


Hey AFB,

What is going on with the market atm? LICS and ETFs are way down, are you going to wait for them to drop more or buy now?

Andee

Firebug’s Answer


Hi Andee,

We did buy when the market was down the other month. But the plan has always been to invest consistently each month. We want to stick to this plan no matter what the markets are doing.
I have no idea what’s going on. It’s fun to try to decipher all the worlds economies and predict what’s going to happen next, but I’ve got better stuff to be spending my time on.
I know it’s hard and it’s something I struggle with every day, but try to stay away from market predictions. Stick with the facts and new/changed laws that will have an impact on your wealth.

-AFB

 

Question (12:45)


Hi Mate,

Would love to get your thoughts on debt recycling. Feels like a faster way to get to FI by leveraging equity in a property, but I haven’t heard you talk about it. Would love your thoughts.

Keep up the good work my man. Loving it.

Cheers,

Ryan

Firebug’s Answer


Hi Ryan,

I’m a fan of DR and it’s something I will be utilizing in the future when we eventually buy a PPOR.
If you have a PPOR loan and also have cash that you’re going to invest anyway, I don’t really see a reason not to use DR to turn part of your PPOR debt into an investment debt and therefore tax deductible. It’s a tax minimization strategy first for me.
For example.
Investor A has the following:
  • $200K PPOR Loan
  • $100K lump sum cash from selling an investment property.

If investor A is not interested in paying off any of the loan from the PPOR ($200K) and instead wants to invest that money into ETFs/LICs, DR can be used to reduce tax with no extra risk,

Investor A can use the $100K to pay off part of the PPOR loan. Open a line of credit (LOC) of $100K and use that LOC to invest in the ETFs/LICs.

Investor A has the same amount of debt of $200K and still has $100K invested. The difference being is that they have saved $1,480 in tax (assuming 4% interest rate of LOC and 37% tax rate) because now half of their loans are tax deductible.

Dave at StrongMoney.com wrote a great piece about DR which you can read here.

-AFB

OCT 2018 Net Worth $559,359 (+$99,551)

OCT 2018 Net Worth $559,359 (+$99,551)

Oh baby!

BIG bump this month after we sold Investment Property 1.

The huge influx of cash actually hid a terrible month for every other asset we hold.

The reason it was such a big jump this month is because CBA valued my property at $416K which was almost $100K less than what I sold it for!!!

And I can completely understand why they would do that. Some people think the banks overvalue properties, but my personal experience has been the complete opposite. I don’t think it’s in the bank’s interest to overvalue if I’m being honest. The property is their security for the loan after all. If something happens and you can’t pay back the loan, they are hoping that the sale of the property will pay them out. This is why a deposit is important for banks. It mitigates risk.

If I were to put my tin foil hat on for a second and cook up a spicey conspiracy. I believe the banks have specifically not updated any of my properties to their true value or even a conservative value to curb further exposure to property. A very specific algorithm that takes into account what similar surrounding properties are selling for has been paused across the board.

BartTinFoilHat

Just look at everything that’s been happening within the last 18 months. I/O loans are so much more expensive than P&I. I’m actually in the process of switching my loans over to P&I not because I have reached the end of my I/O period, but because the rate is so much better for P&I and it only works out to be around $100 extra each month but with the added benefit of paying less interest plus cutting into the principal (which I will get back when I sell).

The banks are making it exponentially harder for anyone to get loans (both investors and homeowners).

I don’t think that this is necessarily a bad thing. Something needed to be done in Melbourne and Sydney as the prices were getting out of control.

But still…Undervaluing by $100K? Really?

 

Net Worth Update

We got smashed in everything but cash this month. Our spending was way more than usual, ETFs and Super were way down and we started to put money onto our travel card for our overseas trip next year.

We are sorta dollar cost averaging into the travel card lol. Instead of doing a big transfer before we leave, we are doing it gradually over the next few months to spread the risk of the AUD dropping.

Our cash holdings are currently $218K 😱

I would often see people with large cash holdings and scoff since that money should obviously be invested straight away…But I’m telling ya. When you’re actually in the hot seat, it’s different.

I know that the research says that a lump sum works out better the majority of the time vs DCA… buuuuuut I just can’t do it. Our money is sitting in our offset and we are going to drip feed $15K in each month over the next 18 months unless there was an opportunity too good to pass up on.

It’s kinda cool to know we could pay off all our debt if we sold our shares too. Very comforting 😊

Properties

IP1 has officially been sold! Wooohoo 🎉

Should I remove IP1 from further updates? It might confuse future readers

‘Hey, why do you have IP2 and IP3? Where’s IP1?’

I might just leave the following

 

Property 1 was sold in August 2018

 

*DISCLAIMER*
Various data sources (RP data, Domain.com etc.) are used in combination of what similar surrounding properties were sold for to calculate an estimate. This is an official Commonwealth bank estimate and one which they use to approve loans.

ETFs/LICs

Oct18NW

Our shares had a terrible month 😭

But I’m secretly happy. We are cashed up right now. If this global recession everyone keeps talking about could just drop already, that would fantastic.

We bought $15K worth of Milton during the dip last month 😬. The plan is to drip feed our cash into the market over the next 18 months at around $15k a pop.

 

Networth

 

Ask Firebug Fridays 12

Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.

 

 

Question (2:48)


What are your thoughts on being over-exposed to the Australian economy?

It’s something I’m grappling with in my portfolio allocation at the moment. So much of the ASX top companies are tied to the Australian housing market and economy – in fact, so much of our economy is tied to the housing market – any kind of pullback will not only affect house prices they will have wide-ranging implications on ASX200 / ASX300 companies, jobs, Government taxation receipts, everything! So this is what worries me.

If we really do believe in diversification, then we should be diversifying across asset classes internationally, not within one very small economy. Diversification across direct property investment and buying an LIC or ETF that focus on Australian shares is not real diversification, given these assets are inextricably linked.

Interested to hear your thoughts.

-Detrimental

Firebug’s Answer


Hi Detrimental,

Australia makes up about 2.5% of the world’s economy (measured by market cap). This sounds and is a very small percentage of the world.

We ain’t one of the big boys, unfortunately.

And to make things worst, the ASX is top heavy with almost everything up the top linked to housing 😤. If housing goes under it’s going to drag most of Australia down with it.

I’m a big fan of diversification, but I’m a bigger fan of franked dividends. Do I get worried about placing so much of my wealth in a small country?

A little.

But I have a fair chunk of wealth in VTS, VEU and Super. This helps.

So many companies that are listed on the ASX are global now anyway. So while they trade in a small economy. Many are linked to other global companies that operate in other regions. So much of the world is linked these days that it’s hard to really pin the bigger companies down to one country. Just look at the states. They make up around 40% of the world but in reality, it’s a lot more than this.

If labour were to remove the franking credit refund next year, it would take away a major reason I invest in Aussie shares and I would have to reassess the strategy.

-AFB

 

Question (13:00)


Hi,

When does purchasing your own house PPOR come into your future plans? Are you planning to move into one of your rentals? How would purchasing a house and potentially having kids affect your FIRE plans?

Tanya

Firebug’s Answer


Hi Tanya,

Did you know that Mrs FB and I were extremely close to purchasing a house back in 2012? I had been working full time for a little bit and wanted to use the FHOG to either build or buy for us. We even put in a few low ball offers on houses we liked in our country town.

The biggest issue was that neither of us could agree on a house to buy. Mrs FB wanted a house that had all the work done to it already whereas I was looking for a doer upper.

We couldn’t agree on anything so we ended up staying at our parents for a few more years and I ended up building IP1 closer to the city because I thought the capital grow would be better.

The decision not to buy in our hometown and to instead invest elsewhere ended up saving us at least $150K if you factor it how much IP1 made us and all the money we saved whilst living at home. Houses around our hometown have pretty much stayed stagnant for the last few years, and if you factor in inflation, they have actually lost money.

CRAZY how one decision can make such a big difference.

Now back to your question…

Renting suits out lifestyle extremely well. But when kids come onto the scene, that will change.

I have written about the pros and cons of buying vs renting before. And I still believe that the biggest reason you would want to buy is for the security. We do plan to buy a PPOR one day to have that security for kids. There’s plenty of fat in our budget already that we could trim if needed. But the truth is that we will just have to have a bigger portfolio to adjust for kids which might mean working a few more years.

No biggie.

-AFB

 

Question (23:07)


Hey Mate,

I have been reading your blog. I see you mentioned to be wary of mining towns. I was considering investing in Gladstone since the property prices are rock bottom. However, I get mixed views from everyone I ask.

What are your thoughts?

Luke

Firebug’s Answer


Hi Luke,

Dude, as soon as I hear property investing in mining towns, I’m like…

Homegif

I’m no expert in Gladstone, pretty much all I know about it is from a few mates that did FIFO work up there years ago.

One of the absolute pillars of property investing is who is going to rent your property? That person has to have money. That money usually has to come from a job.

My biggest issue with mining towns and a reason I never went near them is that the entire economy of the town is usually dependent on one industry. And if that industry packs up and leaves… You could be cactus.

Cash flow is the absolute lifeblood of any property investment. I still have two IP’s and I’m not particularly worried if there is a major downturn in Queensland over the next few years. I would be way more concerned if rent dropped by 50-60% vs property prices. If you have good cash flow you can ride out the bear markets.

Investing in mining towns is way too risky for my liking and you sorta have to time the market perfectly. I’ve never heard of a buy and hold strategy for a mining town. Usually, people get rich by owning property before the mine opened or risky investors buying in the boom, fixing the house up and then selling within a few years.

The most important thing you can do is your own research!

-AFB

Ask Firebug Fridays 11

Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.

 

 

Question (5:37)


Hi Aussie Firebug,

Big fan of the podcast and blog. You’re my favourite finance personality and I love following along each month and watching you get closer and closer to FIRE.

Congratulations on selling your house! What do you plan to do with the funds now? Invest all at once or dollar cost average into the market?

Thanks,

Rick

Firebug’s Answer


Hi Rick,

Thanks so much for the kind words about the blog 😊

This was the most requested question today so I skipped a whole bunch of older submissions to answer this asap.

I have to admit, when the money hit my account it was a bit of a weird feeling.

I spent way too long staring at the below image and thinking to myself ‘Holy Shit that’s a lot of money’

CashLeftOver

And we still had more in other accounts. It was nearly a quarter of mill at one point. But we ended up buying around $15K of shares and I’m leaning towards dollar cost averaging over the next 18 months or so.

That lump sum above is currently sitting in our offset which basically means that IP3 is not accruing any interest at the moment 😬. Cash flow will be off the charts!

Statistically speaking, investing the lot into the market at once will return a better result. But the truth is that I’m letting my emotions get the better of me and am basically too scared to dump it all in there in one go! We will drip feed $15K each month over the next 18 or so months.

That’s currently the plan with this lump sum. When we sell IP2 and IP3, I think we’ll do something similar. There’s also the potential to use the money earned as a deposit for our home when we stop renting.

-AFB

 

Question (13:37)


Hi Aussie Firebug,

I just had a few quick questions:
1) What is your FIRE goal/At what age are you hoping to retire, with what sort of income?
2) How much do you currently work (at your 9-5) and are you planning to progressively cut back on work or straight retire?
3) What is/was your salary at your 9-5?
4) With the potential of a stock market/real estate crash, do you feel you will have to work a 9-5 during these tougher economic times?

Once again, thank you so much for your generosity and sharing.
Keep fighting the good fight.

Take Care,

Tom

Firebug’s Answer


Hi Tom,

  1. I’m hoping to reach FIRE at no later than 35 with an income of $50K per year splits between Mrs. FB and I. Well on track to get there.
  2. 38 hour weeks. Yeah, I’ll probably cut it back to 3 days a week to start with and then take it from there.
  3. I’ve been in an acting role for the last few months which pays $118,000 per year. My normal role pays $90K but I’m a good chance to get this role permanently. I have interviews in a few weeks (wish me luck).
  4. Potentially. There’s always the chance that a crash could happen after we pull the pin which could result in extra work. The truth is I doubt I’ll be earning $0 money once retired anyway. It’s just that the money I’ll be making will only ever be coming from passion projects and not because I have to be there.

-AFB

 

Question (18:35)


Hey Mate,

I’ve been following your blog / Vlog / presence for 12 months now. I’m almost 23 and closer towards the start of my Journey (compared to yourself) however I’m a good saver and very frugal.

I’d love to see you talk about a few things in particular.

1. Your HECS Debt and what you did with it. (I’m in an industry that is performance-based and when I have a well performing month you really begin to feel the drag of a HECS debt). Would you suggest paying it off if you have sufficient funds to do so or let it run its course?

2. Chasing the FHOG. If I was going to bother with it I’d wanna do regional as its 20k vs 10k. However, I don’t really want to live in the property for 12 months. Moreover, the tradeoff in building in a regional area VS the appreciation had in an area maybe closer to Melbourne.

I’d love to hear a little more about what you did towards the start of your Journey and any other obstacles you had to overcome etc.

Regards,

Jordan

Firebug’s Answer


Hi Jordan,

Being a good saver and frugal is really the most important thing for reaching FIRE. Starting young is another major advantage, so you have two big aces in your hand already!

  1. I never paid off my HECS debt early. It’s the best debt you’ll ever have in your life and it never makes financial sense to pay it off quicker. The only reason you would add extra to it is for phycological reasons. If you’re someone who doesn’t like being in debt, paying it off could relieve stress.
  2. This is a timely question as I’ve just sold IP1. I detailed my experience with the FHOG in that post but basically, I received $21K from the FHOG which is the only real reason I was able to afford my first IP in the first place. You only had to live in the house for 6 months back then too. So much has changed. There are so many regulations these days that people can’t get loans. This will affect your ability to sell at a higher price later. I don’t know the future but it seems like the government are hell-bent on keeping property prices low for the foreseeable future. Do your research carefully and make sure you stick to your strategy.

One of the hardest things I had to overcome at the start of my journey was to learn how to relax a little. FIRE seemed so far away that I got obsessive over tiny things. This was not healthy and made life harder than it needed to be. The mental shift you experience as you get closer to the goal is crazy. I sort of wished I didn’t know about FIRE at 24 but kept saving hard and investing and maybe one day just realised I had reached the goal.

But then again, without the goal who knows if I would have made all the sacrifice I did in my 20s…

-AFB

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