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 (5:28)
Hey Firebug,
You’ve factored in the costs of owning and paying off a house in your investment strategy, but it seems all your income is in the stock market, and unless I’m mistaken, you’re renting right now.
When the time comes, how are you going to fund your house deposit? Are you going to save money towards a deposit in the first couple years, sit on it, and invest the surplus into stocks (effectively starting your retirement clock after the deposit is saved)?
Are you going to reach your FI number and then save for a deposit? Drawdown from your stock portfolio?
What would you recommend? I’m starting my FI journey and am in the exact same position.
Thanks for all the content!
Luke
Firebug’s Answer
Hi Luke,
I have written about buying vs renting before and came to the conclusion that renting is better financial the majority of the time (there are exceptions of course). This is especially true if you live in a capital city since the comparative yields are so low (compared to the country). The issue for us (Mrs. FB and I) is when kids come onto the scene. One of the biggest advantages of buying, in my opinion, is that it offers stability. If Australia was similar to most European countries who offered long-term leases (decades long), I would 100% never buy a house. I’d be happy to rent somewhere for 10 years or so and have the flexibility to upgrade/downgrade after the lease term without the hassles of selling and avoiding the buying/selling costs along the way which can be up to 8% of the properties value.
Unfortunately, in Australia, the lease laws are very much in favour of the landlord and not many people offer long-term lease options. As a result, we will be looking to purchase a house after we hit FIRE. Things could change, but I’m thinking that the last IP we sell will be used as the deposit for our home which we will be probably looking at buying in around 3-4 years time. I plan to use the debt recycling strategy and basically turn my house loan into a tax-deductible one that I can use to purchase more shares indefinitely. This will essentially mean that we will never pay off our house, but will be using the home equity to leverage more shares to grow our dividend stream. We get the advantage of stability plus the benefit that real estate offers in cheap leverage with no margin calls. Sounds like a pretty good deal to me.
I hate the idea of paying hundreds of thousands of dollars for something that doesn’t make any money aka a house that you live in. Yeah yeah yeah you could potentially sell your home at a higher price later I get it. But you might live there for 20 years and the whole time you’re getting ZERO cash flow from something that costs you a fortune. Lost opportunity cost anyone?
-AFB
Question (13:45)
Hi Aussie Firebug,
Loving the new podcast! 🙂
What do you think about this whole idea of a “retirement number”. Have you tried to calculate what number you need to hit before you feel comfortable with retiring? And once you do, do you think you will right away? Or do you think you would be inclined to work a few more years to increase that safety margin? Maybe even think “hey with a bigger asset base I can take on some luxuries down the road if I want to”?
The reason I ask is I’ve been reading about this on the blogosphere and I can estimate my living expenses and how much I could live on, but if I picture myself today holding that bag of money I think I would be anxious to pull the plug like that. I wonder “hey what if a medical emergency came up and I needed to shell out 20k for a surgery?”. Or some other unforeseen major expense came up… say a family member needed my financial support?
What do you think?
Lance
Firebug’s Answer
Hi Lance,
Back in the day, I was really obsessed with a FIRE number. One of the beautiful things about reaching FIRE is that it’s very much a game of maths even though there are non-constant variables. You can calculate with some degree of accuracy how much you need before you pull the pin. I was so obsessed with this that I spent a considerable amount of time creating the Australian FIRE calculator that incorporated Super/ non-Super assets.
The closer I get to FIRE though, the less important the FIRE number becomes (which is why I haven’t really developed the calculator further). There will be a defining moment where we hit our ‘number’ which we have loosely put as $1M, but the reality is that when we get there, the odds of us drastically changing our lifestyle will be low. I want to live a great life on the way to FIRE and then have a few options up my sleeve to further enhance my happiness. I would hate to live a miserable life leading up to the goal thinking that a magical number will solve all my life issues.
I sometimes think about working a couple extra years to reach ‘Fat FIRE’ but this basically goes against my whole belief system and a major reason FIRE is possible in the first place. I’m currently reading ‘Your Money, Your Life’ by Vicki Robin which really hammers home that the path to happiness does not mean spending more money or indulging in more luxuries. In fact, living a simple life will not only save you money but will create an environment where all of the basic human needs that are universal for all of us are cater for. These are simple things like shelter, food, relationships, meaning work and safety.
What’s the point of investing if it’s not a means to an end? I don’t invest money to simply have more money. I save hard and invest to allow me to live the absolute best life I can possibly live moving forward. The stress relief freedom that FIRE will provide to Mrs. FB and I down the track cannot be measured in dollars and cents. We’re literally buying future hours of our lives back each time we save money and invest in the market. And the opposite is true every time we spend money on something we don’t need.
There’s risk with anything you do in life. And the reality is that when the time comes to pull the plug from the corporate world, this doesn’t mean I will stop earning an income from some form of work. I’ll be working in some capacity until the day I die. But the key difference is that I will be choosing exactly what I want to do 100% of the time rather than forcing myself to sit through the pointless meetings and waste hours of my life in exchange for money.
-AFB
Question (25:13)
Hi,
Loving the Friday questions.
Often mentioned how important buying below the NTA, however many of the good performing LICs such as WAM are often at a premium and many which are at a discount are permanently under the NTA, so can’t see the benefit of buying at a discount if it’s permanently at a discount?
Would love to hear your thoughts on this?
Thanks
David
Firebug’s Answer
Hi David,
The whole share price to NTA discount/premium business is a bit tricky. Is something really trading at a discount if they are always trading at a discount? And the same can be said for premiums.
The question I would ask is why is WAM consistently trading at a premium?
If we take a look at WAM’s NAV premium and discount history for the last 5 years we get the following.
In December 2013 WAM was trading at a 2.73 pre-tax premium. Whereas it’s trading right now at a 20% premium. Wow!
I’m not too familiar with WAM but I do know they have had very strong returns over the last 10 years.
They also charge a management fee of 1.00% 😓
The only explanation I can come up with here is that investors value the management of WAM very highly. So high in fact that they are willing to pay a 20% premium plus 1% management fee. The returns speak for themselves to an extent. My main concern would be what happens if there was a change in management or some key people left the company?
Are you willing to pay a 20% premium for the future potential of the funds’ performance? Seems like a lot of investors are.
Another risk is if you buy in at a high premium and then have to sell at a lower premium or even worse, a discount. You will lose as the share price to NAV fluctuates. This can be an advantage of buying at a discount so it swings both ways.
-AFB
Hey Aussie Firebug thanks so much for your podcast and blog, its awesome I am really enjoying it. I am 32 single I earn $105K a year and have managed to save $100k on my own, currently saving about 35% of my income however I can probably make changes to save more . I hold all my savings in the bank but when realising how little I get for it I started researching how to make more out of it and that’s how I found you. I am looking at investing in ETF but since I have no experience I’m wondering where to start. I think it’s too risky to put of my money there in one go, I was wondering how you would go about this? Do you consider putting 30% into an ETF such a VAS and then gradually increasing the investment each month a good strategy? Would you take a riskier and approach and put more money in from the start ? Lastly would you put it all in one ETF or would you split it into different funds? I am looking at the VAs and A200, have you seen any other better alternatives? Thanks so much for all your helpful feedback and these posts! happy Friday!
Not Aussie Firebug, but might be able to chime in here… what you’re considering doing with your stash is called dollar cost averaging. This sometimes comes up in blog threads and unless I’m behind the times a bit the general consensus is whack it all in at once. The reason? It’s essentially “market timing” doing anything else, which will either work or it won’t. And no one knows ahead of time which one it will be. Essentially it’s gambling. There’s some stuff on this floating around from Vanguard if I’m not mistaken… Goolge DCA vs lump sum and you’ll get the gist of it.
I very recently went VAS for what it’s worth (right before it dipped about 5%), ’cause it was doing my head in thinking about all the different options. I don’t know whether it’s the right thing or not, but one thing I do know is I’ve stopped thinking about it constantly now. Analysis by paralysis was very real for a while there…
There are two considerations here:
1 – What ETF or fund to choose
2 – How to invest into it.
As for which ETF, that is up to you and what you like the look of. There are many. Do you want a diversified one like VDHG or VDG, as VAS is very specific to one market.
As for how to invest, I’ve both whacked money down at once and dollar cost averaged. Currently I’m into value cost investing which is more manual, but can find better value. https://www.investopedia.com/articles/stocks/07/dcavsva.asp
Forgot to mention that I am swayed by the idea of investing for dividends, hence looking at Australian ETFs. Thanks for the help!
Thanks this is great, looking at DCA vs Lump Sum now!
Hi Gizda,
I don’t know enough about your situations to give you a really good answer. If I were you, I would simply make a start. You can invest a small amount ($1,000) and just get a feel for it. See how it works, watch the market go up and down, receive your dividends etc.
Making a start is mentally one of the biggest hurdles. Once you get going, it’s a lot easier.
I invest in both VAS and A200, they are great ETFs IMO. You probably want to stick with an Aussie domiciled ETF to start with so you don’t have the headache of filling out international forms.
Start small, get a feel, build from there.
Hey AFB, I am really interested to learn more about the debt recycling strategy Peter Thornhill mentioned in his book and how you mentioned you will adopt this when you purchase a house to live in. Are you able to expand a bit on exactly how it works? What happens if interest rates increase? Will it still be viable? I currently own a house and have about $100k equity. I currently have two ETF’s VAS and VGS and am aiming to really grow the VAS ETF significantly for the dividends. Love the blog and Ask Firebug Fridays. Cheers Lloyd
I’m keen of more of a deep dive as well. It’s mentioned a lot in terms of the concept, but the mechanics or process are rarely detailed.
I’m considering whether to go into a margin loan with spare cash, or wait until I do the same and sell and IP to buy a PPOR.
I keep thinking about this strategy too and how viable it is especially when line of credit loans have a higher interest rate.
Currently cooking up the article Lloyd 🙂
Awesome AFB! Looking forward to reading it. 🙂
“Lost opportunity cost anyone?” in the first response above is the same as saying “I have $500,000 in dividend-paying shares giving me enough to pay my rent”. The difference is though, by owing a house now you don’t need an ever-increasing portfolio to fund rent increases.
Not saying owning is better, but saying owning is a lost opportunity cost isn’t really accurate either.
I very much agree with your post Chris. For me the stability (in terms of cost base once FIRE) would make owning a house more favourable than funding rent with shares etc..
Also, it’s not like you are stuck there forever, you could rent it out/sell if you wanted more flexibility.
Hi Chris,
Everyones different, but I would much rather have $500,000 in shares to cover my P+I repayments on my house vs $500,000 in equity so I had no P+I to pay at all.
My example above was not a buy vs rent one. It was a pay off your home loan vs use the equity to invest more in income-producing assets.
Statistically speaking the $500,000 in shares will outpace mortgage repayments plus inflation.
Opportunity costs represent the benefits an individual, investor or business misses out on when choosing one alternative over another.
You’re suggesting to own a house, the opportunity cost is the cost of owning more income producing assets.
Having untapped equity is most certainly lost opportunity even if you’re more comfortable with that alternative.
Again, no right or wrong answer here just my opinion 🙂
Cheers
Each to their own. Everyone has different risk tolerances. We are paying off our PPOR with every spare dollar (5 years to go). Reducing our needed FI number as we won’t have a mortgage payment or rent. Then using spare cashflow to invest. Is it most optimum path? No probably not, but it is a low risk way option that suits our family.
I view it as a no brainer. If you have a mortgage and with interest rates at their lowest in generations why wouldn’t you take the opportunity to pay it off as soon as possible. Yes I know there’s the argument that you can get a better return putting the money elsewhere but I just see it as a chance to pay off your home at a time where borrowed money is cheap.
Not a millennial, but here’s my view. Back in Oct 2015, my wife was unemployed & I was paying $425 a fortnight into our mortgage, which still had $102K. Then, we came into some money and paid it off rather than investing the lot.
If I hadn’t done so, I would have paid $30,600 into the mortgage, but only reduced it by about $16K.
I obtained some very good financial advice last year and realised I could retire. So, I did. I’m not watching my savings/investments being eroded by mortgage payments and I have the peace of mind of having a home. I also don’t have to worry about interest rates when the Reserve meets. Falling house prices are irrelevant to me because we’re not planning on moving. Plus, I don’t think we could handle having to build another aquaponics set-up along with an organic garden. Yep, now the mid-level priority goal is self-sufficiency.
I believe investors are willing to pay a premium for WAM as they’re mostly buying it for yield, which is around 5-6% fully franked, which grosses up to 8%+. If you get any growth it’d be a bonus really with that sort of yield. If their performance is decent that yield is sustainable, but it comes from harvested capital gains so that’s an additional risk versus a simple old LIC which just passes through the dividends it receives.
Hope that helps.
Also that ten year performance of WAM doesn’t paint the whole picture. During the GFC WAM traded at a huge discount, and it’s now at a huge premium, which has boosted performance by a good 3-4% per annum over that time.
I believe ten year NTA performance with dividends included is around 10% – still very good.
I couldn’t find the NAV historic data past 5 years SMA.
Is it one their site mate?
Hi Aussie Firebug. I just wanted to say I really appreciated your episode particularly your answer to Lance. Money is truly not everything and you have to focus living in the now. Just to share my story – my husband and I are mid 40’s and we were close to paying our mortgage off (next month). My husband was being low level bullied at work and didn’t share this with me as he knew I had my spreadsheet and was obsessed with meeting this financial goal. It isn’t worth it! He has resigned and we have never been happier. Your wisdom in this episode was so spot on – focus on creating a happy life whatever that looks like. Abundance isn’t merely financial. Keep up the great work. Belinda x
Hi Belinda,
I’m appreciating the other aspects a lot more as I get older. It’s all about freedom of choice and living your best life. No one wants to be the richest man in the graveyard!