Aussie Firebug

Financial Independence Retire Early

JUL22 Net Worth $1,061,414 (+58,310)

JUL22 Net Worth $1,061,414 (+58,310)

I publish these net worth updates to keep us accountable, have others critique our strategy, and show that reaching financial independence in Australia is very doable without winning the lotto, having a high-paying job, or inheriting a wad of cash. The formula to be able to retire early is simple, the hard part is being consistent and sticking to a plan for many years. The table at the bottom details our entire journey from being $36K in debt all the way until we reach πŸ”₯


It wasn’t too long ago that I was complaining about my lack of social interaction because I worked from home.

Well, let’s just say I’ve had a change of heart ever since the cold snap set in during July.

There’s nothing better than wearing trackies and a hoodie when it’s freezing outside and enjoying a cuppa/hot Milo during work. Our solar panels provide free electricity during the day so I’m able to run a little heater in my office guilt-free and I try to get all the washing/drying done when the sun is shining.

Mrs. FB, I, and some friends wanted to escape the cold during the holidays so we ended up booking a trip to Bali in July.

Quick PSA too. Mrs. FB needed to renew her passport and the whole process was a nightmare that took over 5 weeks. We had to go down to the Melbourne passport office TWICE! If you’re thinking about traveling soon and need to renew your passport, I’d suggest you start the process ASAP.

We ended up booking a 7-night stay in Legian, Bali.

Below are some of the pics from the trip.

Bali Mandira Beach Resort

Potato Head Beach Club

Jimbaran Bay Sunset

ATV Fun

I lot has changed since my first visit there as a 12-year-old with the fam.

My memory of Bali was a dirty, busy, and loud holiday destination that heaps of Aussies went to so they could drink cheap beer.

The island of Bali has had a really interesting transformation in the last 24 months. I couldn’t believe how clean everything was compared to my last visit nearly 20 years ago (damn I’m getting old). I spoke to a few locals about COVID and what happened to the place when all the tourists left.

They told me that a lot of people went back to farming. Either starting their own farms or helping other farmers out during the last 24 months. There was also a big push from the government to clean up the streets and beaches.

I was blown away by how nice the beaches were. I swear they didn’t look like that 20 years ago. I’m not just talking about lack of rubbish either. The quality of the sand and lack of rocks were what stuck out in my mind. Maybe I just went to a few crappy beaches as a kid but Jimbaran Bay, for example, had a world-class beach that would rival most Australian ones. And when you’re eating a seafood banquet on the beach for ~$40pp including cocktails in 27Β° weather, it’s hard to complain.

I also noticed that the island is becoming a lot more ‘westernised’. There were a lot more cafes and eating spots that cater to Australian tastes more so than Indonesian. This is either a positive or a negative depending on the type of person you are but we thought it was nice to have that option.

My mate and I did a bit of surfing which was awesome. I’d love to dedicate a few weeks to get a decent base because riding across the wave looks like so much fun (I can only do the white water for now).

The wife and I were so impressed by Bali that we’re thinking of heading back during winter again next year. Hopefully for a bit longer that time around. I would love to incorporate some sort of east Asian trip once a year where we live somewhere hot for a few weeks. I’m lucky enough to be able to work out of a laptop so I don’t see why not.

In other news, I sold my first data product in July which is a big reason for the big bump in this month’s net worth.

I can’t go into contractual specifics, but this is a bit of a milestone for my business. It signals a move away from consulting and more into product delivery. I think I’ll always consult to a certain degree, but I’ve had dreams about building this product for years and it was awesome to see there was a demand for it in the market.

I signed a three-year deal with my first customer πŸ₯³

And lastly, I’ve been talking about it for years, but I’m finally coming up to Sydney and I’m going to organise a FIRE meet-up.

I’m heading up to FinFest on the 15th of October so I thought I’d kill two birds with one stone and organise a meetup for that night.

The event is on Facebook here.Β 

All details and updates will be posted there. I’m really looking forward to meeting some of you guys in person πŸ™‚

Net Worth Update

The share market and Bitcoin all had healthy gains in July but it was our cash balance that received an out-of-the-ordinary bump.

The cash injection came from the sale of my first data product being sold on a three-year deal (the first year being paid for in full).

Without going into specifics, I’m basically selling ready to consume data models to the customer. It’s a DaaS (data as a service) business model where I’m taking care of all the data engineering, architecture design, ingestion, modeling, and serving for a fixed cost. The customer receives the models via an endpoint and away they go.

I’ve had this idea for some time now but it wasn’t until I worked in London and dealt with companies there were running this exact business model did I know it was really viable. I’ve been tweaking the product for over a year and it’s really exciting to land this first deal.

The plan is to sell the product to a few more customers so I can have enough recurring revenue to justify hiring someone. I have a dream of running a small Analytics company of 5-8 amazingly talented and fun individuals where we can solve fun problems. I want to foster a similar working environment that I was lucky enough to have experienced overseas. That’s my dream for this decade, work-wise.

 

Cash is really high atm. It’s a combination of saving for a car and having money on hand for my tax bill. We also purchased around $3K worth of Bitcoin in July.

*Expenses include everything we spend money on to maintain our lifestyle. We do not include paying down our PPoR loan as an expense, only the interest
*Investment income is simply 4% of our FIRE portfolio divided by 12


 

Shares

The above graph is created by Sharesight

Ohhhh Eeeeee!

$15.5K of dividends baby, plus some strong growth from our international shares. If only every quarter was as good as this.

Our overall portfolio is still down from the all-time highs at the start of the year so it’s all relative but you’ve gotta celebrate the wins when you get them.

We purchased $5K worth of VEU in July because that was the most underweighted split.

 

Networth

JUL22 Net Worth $1,061,414 (+58,310)

JUN22 Net Worth $1,003,103 (-$32,783)

I publish these net worth updates to keep us accountable, have others critique our strategy and show that reaching financial independence in Australia is very doable without winning the lotto, having a high-paying job or inheriting a wad of cash. The formula to be able to retire early is simple, the hard part is being consistent and sticking to a plan for many years. The table at the bottom details our entire journey from being $36K in debt all the way until we reach πŸ”₯


An old neighbour from my childhood neighbourhood (where my parents still live) passed away last month.

I don’t know the exact details but my understanding was that it was very quick (less than 6 months from diagnosis), unexpected and has left a big hole in their family.

The man that passed away was around 10 years younger than my dad.

People always tell you to spend time with your aging parents, but sometimes you need a wake-up call.

A major reason my wife and I came back to country Victoria was to spend more time with our parents and extended family and I’m so happy we did.

My wife and I are so lucky. All four of our parents are still with us and even better still, are fit and healthy to enjoy experiences.

Being able-bodied is so important. What’s the good of living till you’re 100 if you’re hospital-bound from 60? You can still enjoy some experiences but the bulk of them are gone at that stage. It’s one of the biggest lessons I took from reading ‘Die with Zero‘ the other month. Allocate your bucket list items to certain decades throughout your journey because life doesn’t always pan out like a movie. The vast majority of people are not going to retire at 60 and then pursue all their grand plans. You run out of energy. A snow trip to Japan is going to look and feel a hell of a lot different when you’re 50 as opposed to 25.

The entire goal of becoming financially independent is to free up our time to live a happier and more fulfilling life. And one of the greatest joys of claiming our time back is to spend it with loved ones.

My dad asked if I wanted to go with him to the Footy in June. It was an afternoon game on a Sunday at the G and he was heading up to meet some mates and cousins.

I’m pretty sure he asked me to come to a game last year but I just had too much on and was trying to get my freelance business off the ground so I declined.

If I was still working full time, my first instinct would be to think about the 2+ hour train ride and how buggered I’d be for work on Monday morning after getting home late on Sunday.

But I don’t work Mondays anymore 🀘

We headed up together on the train and watched with glee as our beloved Magpies dismantled the ladder leaders, the Melbourne Demons.

You can say what you want about Melbourne, but it has to be one of the best sporting cities on the entire planet! And there’s nothing better than watching a big game at the G!

Collingwood vs Melbourne at the MCG

We made our way down to Swan Street in Richmond for a feed after the game and the atmosphere was electric.

The magpie army had taken over Bruton Avenue as the poor Melbourne supporters were subjected to our famous war cry…

“COOOOOOOOOOLLLLLLLLLLLLIIIIIIIINNNNNNNGGGGGGGGWOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOD”

One of dad’s best mates is a Dee’s supporter which made the victory all that much sweeter.

We ended up at the Corner Hotel in Richmond for a pint and to talk about Collingwood’s path to an inevitable 16th premiership.

And as I was downing my Guinness beer, talking to dad about the game, arguing that De Goey doesn’t do enough or that Cox needs to be more consistent, I couldn’t help but think… this is what it’s all about.

Net Worth Update

Mamma Mia!

All of our assets got crushed in June to give us our second-worst monthly drop of all time. I keep sounding like a broken record but luckily we’re still in the accumulation phase so depressed asset prices are a good thing.

But if the market continues this decline, I’ll have to retract our millionaire status πŸ™ˆ

We also bought around $2K of Bitcoin in June even though I personally think it’s going to drop further. There are talks about the SEC (Securities and Exchange Commission) in America finally regulating cryptocurrencies. I think this could be a huge step in its adoption. If the SEC (and consequently other commissions around the world including ASIC) come out and say that Crypto is an official financial asset, it will give this new technology legitimacy in the eyes of a lot of people. It could also start the process of consumer protection and eliminate thousands of scams that have infiltrated this technological breakthrough.

I’m a free-market libertarian at heart but I don’t think even the most staunch Bitcoin maxi would advocate for zero regulation.

 

 

Our cash holdings are way too high for my liking but I still have a few big tax bills plus we’re saving for a car. Not much I can do about it for now.

*Expenses include everything we spend money on to maintain our lifestyle. We do not include paying down our PPoR loan as an expense, only the interest
*Investment income is simply 4% of our FIRE portfolio divided by 12


 

Shares

The above graph is created by Sharesight

Big drops all around.

We didn’t purchase any shares in June but I’ll be topping up in July for sure.

 

Networth

ASIC Crush Independent Content Creators & the End of Ask Firebug Fridays

ASIC Crush Independent Content Creators & the End of Ask Firebug Fridays


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After much thought and consideration, I’ve decided to end my ‘Ask Firebug Fridays’ segment after the announcement from Australia’s financial services regulator.

On the 21st of March 2022, ASIC (Australian Securities and Investments Commission) published new guidelines for ‘Discussing financial products and services online‘.

These new guidelines have major implications for content creators in the FIRE and personal finance communities.

This is why I wanted to share my thoughts and opinions on these new guidelines and what they mean for AFB moving forward.

What?

In a nutshell, ASIC is cracking down on unlicensed creators who they think are giving financial advice or are seen to be ‘influencing’ their audience.

Their definitions and examples for what constitutes ‘influencing’ are clear as mud.

asic.gov.au

They don’t even give a clear answer to what defines an influencer either, having followers ‘In the thousands’ apparently πŸ€·β€β™‚οΈ.

But who’s an official follower anyway? Someone who listens to one episode of your podcast or YouTube video? An email subscriber? A Twitter follower?

You’re probably thinking they’re only targeting people giving specific or dangerous advice right?

Well, you’re in for a rude shock.

ASIC official speaking to afr.com

We can’t even discuss our own investment decisions or strategies apparently πŸ€”.

It gets worse.

afr.com

So… discussing financial products online such as “shares” or “ETFs” without a licence is now illegal…

WE CAN’T EVEN TALK ABOUT ETFS?!

🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩🚩

This is kinda a big deal.

Stopping people from discussing ETFs is starting to drift into the totalitarian type of conversation. And I don’t say that lightly, but a government that restricts people’s right to discuss certain financial products under the guise of ‘it’s for your own good’ starts to remind me of that book that George Orwell once wrote.

Maybe you’re not worried about these specific new guidelines, but it’s the precedence that they set that should cause alarm. No one cares about anything until it impacts them.

What would you say if one day ASIC released guidelines prohibiting unlicenced parents from talking about money and investing with their children?

That’s perhaps hyperbole, but these new guidelines are one step closer to that dystopian future.

My other issue is there are so many questions and definitions that have been deliberatively left unanswered or are so vague that no meaningful conclusion can be drawn… but let’s move on.

Why?

Let’s give ASIC the benefit of the doubt and say these new guidelines were introduced to protect investors.

This is a good thing!

If an investor loses money after receiving bad advice from an AFS (Australian Financial Services) licenced professional, theoretically they should have a pathway to recoup some of those losses.

If an investor loses money after receiving bad advice from someone on TikTok… bad luck.

AFS licensees have to adhere to a set of minimum requirements which provide important protections for investors if something goes wrong (aka a lot of expensive insurance).

With the explosion of online financial content in the last few years, it makes sense for ASIC to take a closer look at what’s going on. Most content creators are producing honest/useful stuff, but I have to admit that there’s been a trend of creators clearly making content primarily for monetary benefits.

You know what I’m talking about. Creating content for the hell of creating content to make sure their channel stays fresh in the algorithm. Releasing rehashed stuff every second day basically repeating what they’ve already said 100 times.

If content creators are receiving a monetary benefit, there will always be some bias no matter what.

“Show me the incentive and I will show you the outcome”

– Charlie Munger

I love this quote and it’s highly applicable to this situation.

Content creators that make money from affiliates and/or sponsors will always have a conflict of interest no matter how small.

And this applies to me too guys. I try my best to be as unbiased as I can but we all have some sort of bias no matter what (sometimes at the subconscious level)! This is especially true when you’re getting kickbacks.

I think the ‘why’ behind ASIC’s new guidelines is fair enough and makes a lot of sense viewed from this angle.

Having said all that…the way ASIC has chosen to crack down on these bad actors is heavy-handed at best, and oppressive at worst.

How?

ASIC’s solution to regulate an influx of online financial content creators is to make them pay for a licence (which can cost tens of thousands of dollars a year) or threaten litigation to the tune of $1M+ dollars in fines and up to 5 years in jail… πŸ™ƒ

asic.gov.au

To say that this is harsh would be putting it lightly.

To put that into perspective, Australian gangster Mick Gatto has served less jail time than the maximum sentence ASIC can dish out…

A financial content creator might serve more jail time for talking about ETFs, than Mick Gatto… πŸ€”

I’m starting to think we’re losing the plot here?

Lazy Policy Personified

Let’s recap so far.

ASIC’s solution to a few bad apples within a thriving community of online financial content creators is an all-encompassing blanket rule that will crush independent media.

It’s sorta like dropping a nuclear bomb to get rid of an ant nest in the backyard.

Overkill doesn’t even come close to what these new guidelines are and the only people who are going to be left standing are the big media corporations that can afford to pay the licence fee which can be as high as $30K a year.

Here’s an idea. Why didn’t ASIC just come out and say that anyone who monetises online financial content needs to hold an AFS licence?

It’s a lot more specific and tangible andΒ would weed out people who are only in it for the money pretty bloody quickly.

But no. In typical government fashion, the corporate watchdog releases new guidelines that are so vague and light on details that 99% of online financial content creators are caught in the crosshairs.

I understand resourcing constraints and ASIC doesn’t have the time to monitor everyone and everything but surely there’s a happy middle ground.

A few bad apples shouldn’t ruin it for everyone.

Is The Cure Worse Than The Disease?

The public opinion of the financial sector has been in tatters ever since the royal commission in 2017.

ASIC released a report in 2019 titled: Financial Advice: What consumers really think which found that 49% of those who were surveyed didn’t get advice because they thought advisers were more interested in making money for themselves. On the other hand, 35% didn’t get advice because the costs were too high.

ASIC Report

ASIC Report

 

A lot of people are being priced out of financial advice and even more, don’t trust financial planners. The data backs this up time and time again.

I’m not saying regulation is a bad thing, but I think these new guidelines are doing more harm than good.

The truth of the matter is that legislators have made the costs of offering financial advice so high, that the people who need it the most can rarely afford it.

Who should we be prioritising?

The 22-year-old that’s just finished her marketing degree and is trying to make some good financial decisions for the future?

Or the 64-year-old multimillionaire Boomer who owns 7 investment properties?

Why do the legislators think online financial content creators are so popular?

We’re filling a gap in the market that has been created largely because of overregulation.

Some regulation is needed, but these new guidelines are going to wipe out good education material that helps bridge the gap between “I don’t know anything at all” to “I feel confident discussing my financial future with a professional”.

That’s where we content creators thrive! We make stuff relatable and give personality to what can otherwise be a dry topic.

Casualties

One of my favourite podcasts ‘FIRE & Chill’ decided to shut down in April because of these new guidelines.

This is a podcast that averages 4.8/5 on 284 ratings on iTunes and has conservatively helped 10’s thousands of Australians with financial literacy.

iTunes Ratings

Here were two guys making relatable content, for free, that had great reviews.

Another victim of these new guidelines was John Palmer from the very popular YouTube channel ‘INVEST for the future’. John spoke about investing fundamentals drawing from his decades of experience and never charged any money for his videos.

John Palmer decided to shut down because of the new guidelines

“I know everybody would still like the videos to be there, but I just can’t afford to take the risk”

-John Palmer

The Family Finance YouTube Channel

Family Finance is another creator that had to delete a bunch of content. She now can no longer give an opinion on financial products πŸ‘Ž

lifelongshuffle.com

The Lifelong Shuffle blog is another one that has gone into hibernation because of the new guidelines.

 

I could go on and on showing other examples of great content creators that have been impacted by the new guidelines but I think you get the point.

The new guidelines are inadvertently snagging 99% of fantastic freely available Australian-specific resources.

Below is an AFR article titled ‘These young investors don’t want ‘finfluencers’ to go‘ which tells us what we already know. Many young investors don’t trust the financial industry and are looking for alternatives.

afr.com

As I’ve previously mentioned, 49% of Aussies don’t get advice because they think they’re being ripped off and 35% think it’s too expensive.

You’d think that ASIC would be putting more time and energy into ‘cracking down’ or improving the professional industry where the public has clearly lost trust?

Yet, ASIC is targeting online financial content creators who have amazing repour within their communities that don’t charge a dime.

I want to repeat this point because it’s important.

Many young people have lost faith and can’t afford advice in the industry that ASIC regulates largely due to over-regulation. Content creators start to fill this void and collectively rack up millions of views, downloads and sessions from a generation hungry for financial knowledge. The numbers don’t lie. If people didn’t like what the content creators were making, they wouldn’t watch, listen or read.

Shouldn’t we want financial education to be accessible for everyone and not just those who can afford it?

More regulation sounds good in theory but the data suggests that it isn’t working.

I have no doubt in my mind that ASIC had the best intentions when they came up with these new guidelines.

But as the old Portuguese proverb goes…

The road to hell is paved with good intentions

Rules for thee but not for me

One of my biggest gripes with this whole fiasco is the hypocrisy.

ASIC’s position is that unlicensed content creators might ‘influence’ investors to make costly decisions yet ASIC themselves are publishing content that’s detrimental to wealth creation.

Case in point, the Moneysmart website.

Moneysmart is a Federal Government website, brought to you by ASIC.

To be fair, they have a lot of great free resources and tools but their advice for financial fees is downright terrible.

Here’s a cracker.

Moneysmart Case Study

Moneysmart presents a case study about a bloke named Rhett who has around $400,000 to invest, including super.

I won’t go into all the details but the important part is what they’ve published as the fees for this case study.

And I want to remind you that the title of this article is ‘Financial advice costs: Pay the right price for the right financial advice’.

Rhett’s total fees for the first year are $14,000 (Moneysmart’s aggregate column is wrong). This is made up of:

  • $7,660 for the financial adviser
  • $3,000 for the investment platform
  • $3,340 for the product issuer which includes full yearly insurance premiums

$14,000 in fees is 3.5% of Rhett’s original investment.

Worst still, this case study estimates investment fees and insurance premiums to be $9,000 (another summing error) per year ongoing perpetually. And $2,000 of that being the fee for financial advice regardless of changes needed to be made or not.

All up that’s an ongoing fee of 2.25%.

90% of people will have no idea if 2.25% is high or low which makes advice from a government-run website like this so insidious.

How on earth is ASIC justifying this content when they know better than most that normalising these fees serves to further line the pockets of advisers and product issuers rather than the investor.

This is a huge problem because so many people are going to read a case study like this, that is backed by the government and just assume that paying an ongoing 2.25% in fees is reasonable.

In fact, this exact case study was posted in the FIRE Facebook group where most of the professional financial advisors also agreed that the case study fees were too high.

Facebook Group

Facebook Group

But as most of us know in the FIRE community, fees play an enormous part in your wealth creation journey.

A great explanation of this can be found here on the PIA website.

How on earth did the responsibility of not being ripped off, fall to a bunch of content creators without any formal education in finance.

It’s almost as if ASIC wants to normalise these fees so AFS licence holders can still profit after paying an arm and leg in regulatory costs impose on them by the very same organisation…

I wonder what would happen if the majority of the population became financially literate and stopped paying these high fees πŸ€”?

One could speculate that ASICs’ main source of revenue would dry up pretty quickly.

But that’s just speculation of course…

The End of Ask Firebug Fridays (AFF)

These new guidelines have already claimed a few scalps in the FIRE community and AFF will, unfortunately, be added to the list 😒.

I started this FIRE Q&A back in 2018 after getting hundreds of emails from readers each month. I was putting so much time and effort into answering the same questions that I thought a public Q&A podcast would be able to spread the knowledge better.

The AFF segments are clearly in breach of these new guidelines which unfortunately means they will have to be removed.

I’m going to leave the episodes up for the month of July and then remove them from my podcast RSS feed.

If you want to keep an offline copy for yourself, use this link here.

The AFB podcast will be restricted to the interview style format which will focus on the journey, mindset, and life philosophy. I’ll have to tip toe around discussing specific financial products.

We’ll see how it goes.

What Can We Do?

If we want to make real change we need to communicate our message to the legislators that make the rules.

Stephen Jones is the Federal Member for Whitlam and the Minister for Financial Services.

He has real power over how the legislation is written. ASIC merely enforce the law, they don’t make them.

Emailing his office is probably our best bet.

His email address is [email protected] but if you’re on a computer or smartphone, clicking the below link will automatically create an email filling in all the important fields.

CLICK HERE TO EMAIL STEPHEN

Email template

If you’re going to send me an email, here are some key points you might want to include:

  • Introduce yourself and the issue
  • Explain why this issue is important to you
  • Include an ask (suggest a change or alternative)
  • Be passionate and polite
  • Request a follow-up

Wrapping Up

These new guidelines won’t affect me or my family that much. I might have to shut down a part-time hobby I enjoy which is creating content for the Australian FIRE community.

It’s the next generation that I’m worried about.

I can tell you right now that if these guidelines were in effect back in 2015 I would have never bothered creating AFB at all.

There’s a bunch of teenagers growing up right now that will become interested in their financial future in the next couple of years.

Who are they going to relate to?

It sure as hell isn’t going to be a middle-aged Aussie Firebug that’s hopefully blogging about the perils of raising children by that point.

The next generation of Australian financial content creators will most likely never appear because of these guidelines.

The finance industry will keep trucking along and there will be some bigger financial media corporations getting around but it won’t be the same as the independent grassroots movement over the last 10 years.

Maybe we’ll look back and say that the last decade was the golden age of free-flowing information driven by a small bunch of enthusiastic finance nerds on the Internet…

 

As always,

Spark that πŸ”₯

JUL22 Net Worth $1,061,414 (+58,310)

MAY22 Net Worth $1,035,887 (+$5,144)

I publish these net worth updates to keep us accountable, have others critique our strategy and show that reaching financial independence in Australia is very doable without winning the lotto, having a high-paying job or inheriting a wad of cash. The formula to be able to retire early is simple, the hard part is being consistent and sticking to a plan for many years. The table at the bottom details our entire journey from being $36K in debt all the way until we reach πŸ”₯


Super late update for May.

I’ve had a lot of family commitments lately and work has been surprisingly busy. As a result, AFB content has been on hiatus.

I’ve still been recording podcasts though and I have some really good ones coming up in the next few weeks (the first one hopefully drops this Friday).

I got the spicy flu (COVID) in May which knocked me out for a few days. I felt tired AF for 2 weeks and still can’t shake this annoying cough. Not bad though all things considered.

The timing was pretty bad because I had another BJJ (Brazil Jiu-Jitsu) tournament I was meant to be training for. I lost so much fitness from COVID and only had 2 weeks to get back in shape.

I wasn’t at my best but I still had a great time competing.

Trying my best to secure an arm drag

BJJ tournaments with mates you’ve been training with are the best!

Net Worth Update

All investments were down around -$20K for May with the only saving grace being 2 big invoices that were paid for my freelance gig. That, along with our other income sources miraculously saw the NW grow by $5K this month. I have a hefty tax bill coming up though so the cash reserves will be taking a beating soon πŸ˜….

 

Our cash holdings continue to climb in preparation for a few big-ticket items in the not so distance future.

*Expenses include everything we spend money on to maintain our lifestyle. We do not include paying down our PPoR loan as an expense, only the interest
*Investment income is simply 4% of our FIRE portfolio divided by 12


 

One of our most inexpensive months so far since becoming homeowners!

Shares

The above graph is created by Sharesight

Oooft!

Down $15K ain’t pretty but as all accumulators should know, a bear market is precisely what we look forward to!

We bought $5K of VTS in May as this was the holding most underweight in our portfolio at the time.

 

Networth

Debt Recycling

Debt Recycling

We’re on track to increase our wealth by $100,000 dollars over the next 20 years by strategically changing the use of our home loan.

Not by taking on more debt.

Not by changing our asset allocation.

Not by increasing our risk tolerance.

2 transactions were all it took for us to start deducting interest repayments on part of our home loan.

This is a strategy known as ‘Debt Recycling’ (DR).

This article has been on my mind for a while but I really wanted to go through the process firsthand before writing about it. There are a few different ways to do DR but I’ll just be covering how we did it because I don’t know all the nuances with the other methods.

So let’s break it down!

What Defines Debt Recycling

DR = Turning non-deductible debt into deductible debt.

In our case, we wanted to be able to claim our PPoR (Principal Place of Residence) home loan interest as a tax deduction.

Without DR you can’t claim interest from your PPoR loan like you would with an investment property (IP) loan.

How We Did It

*Please note that all the examples in this article will be simplified. Things like rate changes throughout the year, loan repayments and when we officially started DR will remain constant to make it easier to explain.

For simplicity purposes, I’m going to explain our method of DR without our Family trust. I’ll add in the family trust later so everyone who does have a trust can see how we did it but I want to make it simple to start with.

IMO, DR works best when you have a lump sum that you’re planning to invest anyway. That was the position we found ourselves in after we sold IP2 and had over $200K in cash.

We also bought our PPoR last year and I was planning to DR part of our home loan so I made sure that we split it into two parts.

Here is how our situation looked before DR.

Before DR

As you can see in the above picture, Mrs Firebug (Ladybug in the picture πŸ˜‚) and I have to pay ~$10K of interest a year for both our home loans (which are secured against our PPoR). These are real numbers (sorry Melbourne and Sydney folk πŸ™ˆ) when we first settled on our home.

We can’t claim that ~$10K as a deduction because the use of the borrowed funds were for our PPoR and not an income-producing asset.

We also have a lump sum of $211,000 from the sale of our investment property that we would like to invest.

For illustrative purposes, below is how it would have looked if we skipped DR and just invested our cash in shares.

Investing without DR

There’s nothing wrong with the above picture but the Firebug Family doesn’t save any tax on their PPoR home loans.

The point of DR is to change the use of the borrowed money for deductions.

We were able to change the use of loan 2 by completely paying it down and then redrawing it out to invest in shares.

This is how it looked after DR Loan2.

DR

ΒΉ Loan2 was paid down and redrawn to purchase shares. Loan2’s interest payments are now tax-deductible
Β² The Firebug family received $6,330 in dividends but can deduct $6,077 in expenses from Loan2 and thus only need to declare $253 in additional income.

As you can see in picture 2 we were able to change the use of Loan2 to become an investment loan.

We then used this new loan to buy income-producing assets (shares) and are now able to claim a deduction on the accrued interest saving a total of $1,975 on tax.

But how exactly did we repurpose the loan?

In one word… redraw.

Once we sold IP2 and had the large lump sum, I simply paid down Loan2 completely and then redrew it back out.

The above picture shows the balance for Loan2 to originally be $209,508.90 on the 9th of November 2021. I paid it down to $0 on the 29th and then used the redraw facility to pull the $209,508.90 back out straight away. Redrawing from a loan is considered new borrowings by the ATO.

I was very worried that the loan would automatically close so I went down to an actual branch to ensure that it didn’t. The girl that helped me actually knew what DR was which helped a lot.

And that’s basically it.

We essentially are in the exact same position we would have been without DR but now Loan2’s debt is tax-deductible.

How We Did It (With The Trust)

The concept of DR remains the same, it’s just more complicated with a trust. (like a lot of things πŸ˜…)

Here’s how we did it.

DR with a Trust

ΒΉ You need to make sure that the terms of the loan allow for changes in interest rate to be the same as what the bank is charging you. In this example, it’s constant at 2.88% when in reality the interest rate would fluctuate. The loan agreement between the Firebugs and the trustee needs to be in writing and on arm’s length terms too.
Β² The Firebug Family pay and receive the same amount ($6,077) so their tax position is nill.
Β³ The distribution is only $253 because the trust had to pay $6,077 in interest to the Firebug Family. The distribution will be taxed at the marginal rate of the beneficiary.Β 

There’s a lot going on in the above picture but I hope it makes sense. Leave me a comment below if you need something explained in more detail.Β 

What If I Don’t Have A Lump Sum?

Not everyone will have a large sum of money to completely pay down a split of their loan. We implement a dollar-cost averaging strategy which means we don’t save up large amounts to drop in at once. The sale of IP2 presented a rare opportunity for us to execute our DR strategy but I understand that won’t be the case for most people.

Annoyingly, I actually had some examples and financial products that are suitable for people who want to do DR whilst DCA’ing. But since ASIC doesn’t let people like me talk about those sorts of things without paying them money, I unfortunately had to delete this part out of the article :(.

Terry W Tips and Future Podcast

I reached out to one of if not the best SMEs (subject matter expert) for DR in Australia for his top tips. I’m also teeing up another podcast with him to do a DR specific episode. Please let me know in the comment section what you want us to cover and I’ll try to add it in πŸ™‚

If you want to know more about Terry, check out the first podcast we did together here. He also has his own podcast which you can check out here.

Terry’s top tips πŸ‘‡

  • You can only claim interest if borrowing to buy income-producing assets
  • You need to avoid mixing loans as this will reduce tax savings
  • Split loans first before repaying
  • Repayment needs to be done once in full
  • Redraws can be done in stages
  • If borrowing to buy non-dividend paying shares the interest could be a cost base expense so it would still be worth splitting and recording the interest as it will reduce CGT.
  • Written loan agreements on arm’s length terms are needed if the borrower and the investor are different
  • Never redraw into a savings account with cash as it will cause a mixed loan
  • Avoid paying into a share trading account with cash in there as this will cause a mixed loan.
  • It is possible to debt recycle with any loan that has redraw, but some loan products are better than others, so see your broker about this.
  • Debt recycling is a tax strategy so only registered tax agents or tax lawyers can advise on it.
  • Advice on what to invest in would be financial advice if it involves shares or super as these are financial products so only an AFSL holder or authorized representative could advise on this.
  • It is possible to debt recycle with investment properties too.

Conclusion

It’s important to note that DR didn’t change our investments, amount of debt, asset allocation or anything else really. We simply changed the use of the borrowed money.

I used the 32.5% tax bracket but this strategy would save you even more money if you have a higher marginal tax rate (I forgot to include the medicare levy too which would have made the tax savings even more impressive).

There’s also a pretty good chance that interest rates are going to rise in the next couple of years.

More interest = more deductions for us.

Oh, and if you’re wondering how I came to that $100,000 number in the intro. I simply punched in $1,975 into a compound interest calculator for 20 years at 8 interest. There are a bunch of assumptions right there but it’s impossible to know how the interest rate will move over that time period and we plan to redraw equity out of Loan1 and Loan2 which will mean more deductions. Essentially, we don’t ever plan to pay off our PPoR loan. I eventually want to DR Loan1 and then continuously redraw equity for the foreseeable future (Thornhill style!).

This strategy is something that took less than a week to sort out but will be saving us money for as long as we have debt against our PPoR.

Pretty cool if you ask me πŸ™‚

Are you doing DR? I’d love to know why or why not in the comments section below.

 

As always,

Spark that πŸ”₯

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