Aussie Firebug

Financial Independence Retire Early

Ask Firebug Fridays 23

Ask Firebug Fridays 23

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 (2:30)


Hi Aussie Firebug,

I currently have some cash funds that is used as my emergency fund. Given the poor cash rates on bank savings accounts, what would you recommend I invest in, in order to generate some return whilst still having access to the funds? I know Mutual Funds do have some fixed income funds.

I assume this would be a similar position for most investors when they save up for a deposit on a property.

Thanks,

Franco

Firebug’s Answer


Hi Franco,

This is always a tricky one to answer and it depends on a few factors.

Firstly, your emergency fund should always be in cash and I wouldn’t be using it as a down payment for a home. It’s possible that I’ve misinterpreted your email but it sorta sounds like your saving up your emergency fund to one day use as a deposit for a house? Sorry If that’s wrong.

When are you planning on buying? What’s the timeframe? Your investing horizon will dictate a lot. If you’re realistically going to be buying a house within the next year or two, I’d personally just leave it in a HISA.
You could potentially make more by investing in other assets but you run the big risk of a market going downhill when you want to pull your money out to use!

Unfortunately, the current economic climate is punishing savers 🙁

-AFB

Question (6:40)


Hi Aussie Firebug,

My partner has been following you for some time now and he has recently introduced me to your blog! My partner and I are 23 and 21 and are keen investors and avid followers of your blog. I feel as though we are in the very position you would have been in at our age with similar goals in mind. We were considering buying a house over the next few years but having read your blog, we’ve opted to rent until kids are in the picture and we’ve even decided to delay our euro trip as well lol.

I am just messaging you to see if in hindsight you wish you had done anything differently roughly 8ish years ago or any advice you would give to your younger self! (Other than the value of investing in ETFs :P). Specifically speaking in terms of investments.

Thanks so much and look forward to hearing back from you.

Firebug’s Answer


Hi Jess,

I would have never set up a trust if I’m being honest. Too complicated and you don’t need it to reach FIRE. A 50-50 split or 100 to the lower income earning wll work just fine. It also makes accounting difficult. Having it in your own name is a lot more simple and sometimes it’s worth paying more for simplicity.

I would have bought IVV instead of VTS because IVV is almost the same (same low MER) but is domiciled in Australia which means no W-8BEN-E forms. Small change but again, less complicated.

I don’t regret investing in property even though it’s way more work. It has taught me many life lessons.

I wasted a whole heap of money before discovering FIRE around 23-24 so you’re already way ahead. You guys are so young that getting the snowball started now is so beneficial.

The other thing I’d say is that you need to make sure you’re living a great life too. A great life doesn’t cost much but don’t deprive yourself too much. I was way too hardcore at the start and in the long run it doesn’t actually make that much of a difference.

I bought a car worth $21k that I slightly regret. Could have had a similar car which would have got me from A to B for around $6k but oh well…

Other than that… Not much really. I’ve always been pretty frugal in general so no major stuff ups.

Hope that helps

-AFB

Question (16:25)


Hi Aussie Firebug,

Firstly, thank you for everything you’re doing. The information and content that you put out is truly life-changing. You’re inspiring me to save, invest and get excited about what’s possible in my financial life, for that, thank you.

I’m also looking for your advice on this topic, here’s my current situation.

My partner and I began our investing journey about six months ago. We currently own Betashares A200, VAS and VEU since following your strategy which makes sense to us.

We also follow Scott Papes work and he recently released his ‘Idiot Grandson Portfolio which listed reasons why he prefers VAS over A200. We’re now considering switching to VAS and I’m trying to understand the implications of buying different ETF’s (although they are both index-tracking ETF’s). And the primary question I want to get clarity on is; will the dividends pay more if we hold more of one ETF versus holding two ETF’s? For example, will I receive more dividends if I have say, 200 units of A200 shares versus having 100 VAS and 100 A200?

I guess overarchingly, I want to understand how having a bunch of different shares that are the same in many ways affects the overall dividends and compound interest. I know you recently switched from VEU to an iShares product and I keep asking myself, ‘doesn’t that affect his compound interest longterm?’.

Any advice you can shed on this topic would be greatly appreciated

Nu

Firebug’s Answer


Hi Nu,

I’m pumped to hear that you’re enjoying the content so much mate 🙂

I’ve read Scott’s ‘Idiot Grandson’ Portfolio too, it’s a fantastic read with great reasoning behind the decisions on investment products.

The price of any unit of a company is largely irrelevant as in it’s an arbitrary number. That’s because when they first go public, usually another company comes in to give a valuation for the IPO but after that, the market sorts out it’s worth through supply and demand based upon how much of the company a single unit is worth.

Theoretically, if a company is worth $100 and they have 10 units outstanding, that would mean each unit is worth $10. But what happens if they dominate the market and are worth $100M in five years? Each unit is now worth $10M which means it’s very hard for people to sell their units to other buyers. What a company can do is a share split where the board of directors increase the number of outstanding shares to current stockholders. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed.

So each company/index fund may have a different value for their unit price, but as long as the underlying assets are the same it should not impact return at all.

A200 and VAS are a bit different in terms of dividends because of how new A200 is as a fund. I believe I’ve answered why that would be the case in another AFF as it’s a bit lengthy to go into. But over time they should be extremely similar.

I hope that answers your question mate.

Cheers,

-AFB

Ask Firebug Fridays 23

Ask Firebug Fridays 22

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.

So I’ve got a bone to pick before I get started today.

I’m well aware of my struggles with the word ask (thank you for constantly reminding me 😂). I pronounce it like A-K-S (arks) instead of ask.

Well! I opened an email from a reader the other day who shed some historical light of my pronunciation of the word.

In a stunning turn of events, it turns out the pronunciation of the word ask, now considered standard, descends from a northern England version of the verb that in most midland and southern texts through the 1500s was spelled with x or cs (arks).

The reason that it’s now pronounced ask is because of a process called metathesis which is the transposition of sounds or syllables in a word or of words in a sentence.

I don’t claim to know what that exactly means but from what I could gather from the Wikipedia page, it’s basically when two very similar sounds switch inside of a word. Other common ones are
comfortable > comfterble
nuclear > nucular
prescription > perscription

The word ‘ask’ was most likely pronounced incorrectly but over time people wrote it the way they said it and it became the standard we have today.

They’re also a lot of evidence to suggest that the way you pronounce the word will be heavily influenced by where your ancestors were from as it was spoken differently in different places in England.

So wrapping up. The word is definitely pronounced ‘ask’ but now I have a better understanding of why I and many others say it the way we do!

And with that, let’s jump into today’s episode.

 

Other readings: 
Metathesis (linguistics)
People Have Been Saying “Ax” Instead of “Ask” for 1,200 Years
Why do some people say “aks” or “ax” instead of “ask”?

 

Question (4:15)


G’day AFB,

I am 29 with $70k saved and I don’t own any property. I am completely sold on parking my 70k savings into a LIC, re-investing my dividends plus contributing an extra 5k/year at minimum and not touching it for 30 years. But here’s the plot twist – through my work, I am entitled to a one-off 20-25k (after-tax) payment that can only be used to purchase a first home (which I must live in for 12 months). This is not including the Queensland first home owners grant of 15k, which I am also eligible for.

I have never been interested in real estate, and I am just about to pull the trigger on shares… but now that I consider the 20k+ extra that I can access, it is really making me think about buying a cheap two-bedroom apartment, living in it and renting out 1 room… instead of investing in shares.

So my question is – am I crazy not to take the extra 20k available and buy property instead?

Thanks for the great blog, and thanks in advance!

Regards,

Tom

Firebug’s Answer


Hi Tom,

That’s an amazing work perk!

I’ve been out of the property game for a while now and wasn’t aware Queensland has a $15K FHOG. If you combined that with your entitlement from work, that’s creeping up to be potentially ~$45K! This is not a small amount of money and something you’ll need to put serious consideration into.

Personally, I would never make such a big decision like buying a property just because of a grant… but a grant that’s going to give me $45K… hmmm I can probably make that work tbh!

My question to you.

Are you ever going to buy a home to live in? I understand first hand the appeals of renting and investing the surplus of money into the stock market but an opportunity like this seems too good to miss if you’re ever considering buying a home in the future. Unless there’s you’ve got something specifically against it that I don’t know, if I were you, I would take advantage of the free money from your employer and government.
You have to remember, even the governments FHOG can be axed and is never a guarantee.

I experienced this first hand back in 2012. A few years beforehand, one of my mates received something like ~$40K from the Victorian FHOG to build a new home in country Victoria. 40 bloody thousand bucks from the government! And he was going to buy anyway so this was just money for jam! The grant decreased the next few years and I ended up getting a tad over $20K back in 2012. After that, I believe it disappeared for a while.

My point is opportunities like may not come back around…

Have a long hard think as your two options are both good IMO.

-AFB

Question (11:31)


Hi Aussie Firebug,

I have been listening to JL Colin’s a bit and he talks about leaving a legacy for his kids. He believes his investments will, following the 4% rule, be greater when he dies thus leaving it to his kids. His kids will then live on his investment following the 4% rule who in turn can leave it to their kids.

In the Australian contexts using your strategy 3, one would have a large amount to pass onto the kids. Have you thought about how you would do this? Would some sort of trust be the most appropriate way to set up this continuing legacy? I have two girls and would like to protect the investments from any failed relationships etc they may have.

Interested to hear your thoughts

Andy

Firebug’s Answer


Hi Andy,

This is such an interesting question and I bet you could ask 10 people chasing FIRE and get 10 completely different answers. I’ve thought about this a little, not a lot, but at this stage right now (and it could change). I want to give my children as much as they need to fulfil their full potential and not a cent more.

But how much will that be you ask?

That Andy… is the million-dollar question!

I think it’s going to be hard enough not to outcast them socially by being the only kid in school without the latest phone or povo brand sneaker. I had experiences from my childhood where I was teased because of the brand of shoes I wore… but this helped thicken my skin and I had the personality type to deal with it. Will my kid be like that? Or will they suffer psychologically from something I could have easily prevented? Maybe I’m overthinking this?

Raising them through to adulthood while simultaneously teaching them the value of money is a struggle every parent goes through I’m sure.

But having a multimillion-dollar portfolio to pass on to the next generation may be a little bit more specific to us FIREbugs.

This may sound selfish to some but please hear me out. As of right now… I don’t plan to leave my kids anything!

I plan to do my absolute best raising them. This will include free housing, unlimited food, paid for education, etc. But what I don’t want, is for them to know that their future financial security is taken care of because their parents are financially independent and they will eventually inherit the colossal snowball!

I truly believe that if I choose to do that I would be robbing them of an opportunity to participate in what I consider to be one of the most fulfilling accomplishments anyone can do in their life. And that is to reach financial independence through hard work and dedication.

We’re all dealt a different hand in life and everyone receives help along the way, some more than others. But passing on the entire fortune to your kids is like giving them the Super Mario Warp Whistle so they can skip straight to the end. They won’t know how much fun the game is if they don’t play it!

I hope my kids are financially independent before I kick the bucket. I’m unsure where I want the snowball to go. Most likely a charity I’m passionate about.

If are set on leaving a legacy behind for your kids, I don’t think you can beat the estate planning of trusts. There are so many ways you could do it too. Maybe they don’t receive everything at once? Maybe they only ever receive the dividends from the portfolio each year? I’d go see a trust expert and explain what you want to achieve and I’m sure they could implement it.

-AFB

Question (22:15)


Hi Matt,

Like yourself, I’m also looking at moving overseas to work for a while in the next couple of years. I’m assuming that your existing property investments may be negatively geared to take advantage of Australian income tax law. Now that you are earning income (and paying tax!) overseas, what impact is this going to have on deductions and cashflow for your Australian property investments?

Bryce

Firebug’s Answer


Hi Bryce,

Nice to hear that mate. Moving and working overseas has been one of the best decisions I’ve ever made in my life!

Our two remaining properties are positively geared before depreciation is factored in. With the depreciation schedule, they are negatively geared.

However, we bought both the properties in the trust which was a mistake in hindsight. So we have never been able to reduce our income through negative gearing on those properties. What we have been able to do though is reduce the taxable income of the trust using those deductions. Even though the trust earns money in the form of dividends from the shares. It has never had to make a distribution because the deductions have always been more than the income.

When we sell the properties, the trust will start to distribute income like normal since there won’t be anything left in there that will cost the trust money.

The flexibility of the trust has actually been really handy whilst we’ve been overseas and has meant that we are able to distribute income (when it comes) to other people and not be taxed 32.5% because we are not residents of Australia for tax purposes. It also enables us to continue to purchase shares as they’re not in own personal names but rather the trusts.

The money I make through aussiefirebug.com will be taxed at 32.5% from the get-go which is not ideal. I did seek advice from my accountant and was willing to bet that I would have greater tax savings on my consulting checks while being a resident of the UK for tax purposes rather than staying an Australian one.

It’s all a bit complicated and I’m going to publish my Australia to UK article when I finish it that will explain this in detail.

-AFB

Ask Firebug Fridays 23

Ask Firebug Fridays 21

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 (1:50)


Thanks for the great content!

I was just wondering what your thoughts are on gold? Is owning some gold a part of your financial plan?

Thanks a lot for your time,

Julia

Firebug’s Answer


Hi Julia,

Gold to me is a hedge against inflation and something I’d consider if I wanted to reduce volatility within the portfolio.

I don’t really consider it an investment per se because it doesn’t generate any cash flow. You have to rely 100% on capital gains for it to work which I don’t like and was one of the biggest reasons I moved away from real estate. To me, it’s more of a store of wealth which historically has had an inverse relationship with the stock and property markets (good for volatility).

Historically, shares have absolutely smashed gold over the long term.

Take a look at the total return stock index (S&P 500) vs Gold and Silver over the last 50 years

Source: www.longtermtrends.net

And if you go back 100 years the gap is even wider.

Take a look for yourself here at long term trends.

You can basically ignore the first graph on that page because it doesn’t include reinvesting dividends which is ridiculous. We want to compare the total return from an index, not just the share price.

I only want to invest in assets that pay me. This may change in the future when maybe I’m not as concerned about the cash flow and perhaps caution on the side of diversifying and maintaining my wealth. Precious metals could come into play at that stage.

But right now, golds not on my radar.

-AFB

Question (7:28)


Hi AFB,

Congratulations to you for what you have achieved & continue to achieve on your FIRE journey.

Thank you for your incredible generosity in sharing your knowledge, passion & enthusiasm. Inspirational!

Up until about 6 months ago, I exclusively purchased ASX listed shares directly but in the last 6 months decided to start purchasing ETFs.

Now that I have the ability to compare apples with apples, I have to say that my annualised returns for direct share purchases are at least twice that for the ETF benchmark of VAS (over the entire 6 years).

I am not writing to boast – in fact, my purchases have been largely recommended by 2 share sites I subscribe to (intelligent investor & barefoot investor) so I can hardly take any credit.

I know that the FIRE community is so bullish on indexes but I am not sure that you are not missing out on some reasonable returns.

I know the theory that most people don’t beat the index & probs that is true in context. Little of what Buffet says in regards to share investing is wrong. but I think with a little bit of ‘expert’ advice & by that, I don’t mean full-service brokers who only work for themselves.

I reckon that solely investing in indexes might be limiting your returns.

Anyway, I guess I just write to you to raise the issue with you & share my thoughts.

Once again – congratulations. I wish I had had your insight at your age.

Thank you, take care

Tanya

Firebug’s Answer


Hi Tanya,

Thanks so much for the kind words 🙂

I love receiving emails like this, it’s a real motivator that I must be doing something right and it helps me make more content, much appreciated!

I’ve often grappled with this question myself. There were times during the GFC where some of the big 4 banks were trading so low that you could have had a ridiculous yield of 13% plus franking credits! We know now that they recovered but at the time there was a real concern that some of the banks could have gone under which is why the prices fell so much but still. It would have been extremely tempting to swoop in on some of those cheap shares and clean up.

However!

As you’ve mentioned, the FIRE community loves indexing because we don’t need to pick the winners and losers, we just buy (nearly) everything.

Could we be missing out on better returns?

Yes.

Do I care?

Nope!

I’m more than happy with the idea of a 7-9% return over the long term using ETFs and LICs. I personally don’t think the extra risk is worth trying to beat the market but everyone is different. It’s also a bit of fun trying to pick winners here and there and I wouldn’t completely rule out the idea of allocating a small percentage of the portfolio (5-10%) to individual stocks. I personally don’t feel the need to do that at this stage but when the next crash comes it could be tempting to jump on some companies as everyone is panicking and heading for the exit.

I will say this though. As indexing becomes more mainstream, the likelihood of active investors outperforming the index increases.

Think about it. Back in the day, everyone was trying to outperform everyone and charging big fees along the way. But that game is always going to have winners and losers by its very nature. And if you factor in the management fee, there was a very high chance you’d underperform the market.

Index investing solved this issue IMO.

But let’s say that the majority of the market is made up of passive index investors. In theory, the market would become inefficient and there should be a lot more opportunities for active investors to snag a bargain especially within the small-cap and emerging market sector. If the market reaches a point where the majority of investors are not doing research or looking at anything other than the top 200 companies by market cap (for example), active management (professional or amateur) could feast on the inefficiencies of the market and you’d see and swing back in favour for active management. This is until the opportunities start to decline as more and more active investor gobble them up and the extra in fees once more becomes not worth it.

This see-saw between passive and active would continue forever in my opinion but no one (especially me) really knows what would happen. That’s my take anyway.

The other thing I want to mention is that while you have done well over the last 6 years, it’s not a long enough time frame to conclude that your individual stocks have outperformed the index. Come back in 15-20 years and once a recession has come and gone 😜.

-AFB

Question (15:38)


Hi mate,

I’m so happy to find our Australian fire blog. I’ve been reading and listening to people like Mustache, fientist etc for quite some time.

One thing that has always annoyed me is seeing how little they live off and not understanding how they can possibly make that work. I would love to see a breakdown of your yearly spending habits. I’ve had a look through your blog and can’t find anything that matches this. I noticed you seem to live off only 50k a year with you and your partner, which also seems too bloody good to me haha.

I look forward to seeing what sort of expenses you count.

Thanks, Cameron.

Closet F.I addict

Firebug’s Answer


Hi Cameron,

Take a squizz at our last saving review article which detailed exactly how much we spent during from July 2017 to June 2018.

I need to publish our current review from the last financial year (18/19) but it’s gonna be a hard one because we moved counties and have another set of banks over here in the UK. I’ll get around to eventually.

From my experience, you need to nip the big four in the bud.

90% of people will spend their hard-earned dollars in these areas in order of the most expensive (usually).

  1. Housing
  2. Food
  3. Transport
  4. Holidays

Look at these areas first, the other smaller things do add up over time but they can wait for now.

I’m not gonna sugarcoat it, if you want to buy a house in either Melbourne or Sydney, you’re going to pay a big price for that privilege and delay your FIRE date. Renting in the city can actually speed it up if you can take advantage of the job market and snag a high paying job (depends on the industry you’re in). But there’s plenty of jobs that are available in the country where housing affordability is a lot better.

I’m not the best person to ask about food advice because there’s still heaps we could shave off our grocery bill but we enjoy our snacks and buy high-quality produce. It’s something I’ve never been too frugal about, and that’s the quality of food you put in your body. But buying this stuff can be expensive. There are the obvious wins like always packing you lunch and not going out too much. But I’m calling the kettle black a little with that one because we have been social butterflies since being in London and I’d hate to look at our food and drinks category for the last 6 months. Buuuuuut this trips a bit of an exception because part of experiencing the world for me is to enjoy the different cuisines and restaurants.

Cutting down on meat can also halve your food bill.

Being sensible with your car (if you even need one!) and holidays is such a personal choice that it’s hard to comment on. You need to strike a balance between saving for your freedom and enjoying your life. We delayed our FIRE date to live out a dream and I wouldn’t change anything about that decision.

The first step in all this is to track your expenses.

Do you know exactly where your dollars go? Feel free to flick me your breakdown and I can provide a more detailed comment if you’d like.

Cheers,

-AFB

Ask Firebug Fridays 23

Ask Firebug Fridays 20

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 (2:00)


Hi Aussie Firebug,

Since it’s Friday I thought I’d ask you a question:

How do you feel about REITs? VAP has fairly stable growth and something around a 7-8% yield and would provide diversification across different types of property (commercial etc) and across the whole country. I think there are some tax implications in that distributions don’t qualify for franking credits, but since they may be gone soon anyway, does this really matter?

I have also read that REITs are only loosely correlated to shares, which could be beneficial during market crashes.

Thanks,

Liam

Firebug’s Answer


Hi Liam,

I’m not a real big fan of A-REIT’s because I think if you’re going to invest in real estate you might as well invest directly and take advantage of all the things that come with direct ownership vs using a structure like A-REIT’s. Even if you’re technically investing in real estate, by using an A-REIT you lose the ability to leverage at a low-interest rate, physically add value to the investment, use your skills and experience to solve problems and cut out the middlemen during transactions etc. etc..

I would much rather invest in shares if I’m a passive investor and real estate if I’m an active one. I also think the management fee on A-REIT’s is too high. VAP is decent amoungst A-REIT’s but even that is sitting at 0.23% which is more than double my most expensive ETF/LIC.

You do make an excellent point with the franking credits, however!

I’ve actually started to lean away from fully franked dividends since the ALP went after the refund. I know they didn’t get in and the changes won’t go through but my naive ass didn’t actually think such a dramatic effect that would have severely altered our retirement plans, was even on the cards!

I’m still buying Aussie stocks but the legislation risks associated with fully franked credits has me altering my strategy a bit (currently in the middle of an article about this).

So, in this case, I can definitely see an argument to use A-REIT’s unfranked income to soak up franking credits from Aussie stocks. I don’t currently have them in the portfolio but I’d consider a small amount (5%-10%) in the future if talks about franking credit refund flare up again.

-AFB

 

Question (8:33)


Hey Aussie Firebug,

Love the blog! Thanks for providing great content!

I have a question about helping family to invest. My family are clueless about investing. Their idea of building wealth is to hide money under the mattress, they barely even trust their super and when they do make ‘’investment’ decisions, I don’t think they’re based on a sound understanding of the market.

My parents are approaching retirement and luckily have a bit of cash sitting around that could be put to better use. The problem is I don’t feel comfortable telling them what to do with it. I’m new to this myself and don’t want to be responsible in case things go wrong.

I’m even scared to suggest possible options (eg, Vanguard) in case they take my word for it, don’t do their own due diligence and then things go belly up.

How would you handle this? Give them the info I have and let them decide, or don’t get involved at all?

Appreciate your response!

-Girl On Fire

Firebug’s Answer


Hi Girl On Fire,

This is a great question and something I have personal experience with so let me walk you through what happened with me and my parents first and then I’ll get into my take on your situation.

I owe nearly everything I’ve learnt about discipline, value of the dollar, hard work, and investing to my parents. They didn’t teach me about ETFs and the stock market, but the lessons I learnt from an early age set the foundations for a healthy savings rate, financial discipline and what constitutes getting ‘ripped off’. These are astronomically more important to learn than simply understanding how the stock market works. There’s plenty of people out there that know all the principals of FIRE like the back of their hand, but don’t have the discipline or can’t accept the delay gratification it takes to reach the end goal.

My folks are now both retired and financially independent. Not bad considering they were modest earners with three kids who all went to Uni too! They achieved this through hard work, saving a decent amount of their disposable income and eventually investing in real estate.

And let me just jump in now before any conclusions are made, like…

‘Ahhh no, not another Boomer couple who rode the property boom! Give me a break’

They missed the 2000-2004 boom and actually started relatively late in life (by FIRE standards) around their mid to late 40’s I believe. Which is why I always laugh when someone writes in asking if they’ve missed the boat because they’re now the ancient age of 37 and have just found out about FIRE lol!

Long story short, Mum and Dad reach FI through property and were in a position later in life where they were equity rich but cash flow poor. Dave at SMA wrote about this common situation Aussies find themselves in here which is worth a read.

They had a bit of Super and other assets but the bulk was in property.

So when the time came to retire, I was curious to see if they had enough and was well into my FIRE journey too (which they know about) so it only made sense to sit down with them and go through it all. Using some very conservative math we worked out that they were well in the clear and could realistically retire now and never have to work another day in their lives to live the lifestyle they were currently living.

That was the easy part though. The hard part was actually setting up a plan and putting it into motion that would enable them to live off their portfolio to fund their retirement.

I was now facing a situation that many do, where they know what they would do but get extremely scared to say anything just in case something happens and they are blamed!

I knew that if I were them, I would sell all the properties and put the profits into my super where I could invest it in the sharemarket and live off the passive income.

But the thing is, I’m not them, and what way too many people forget is that sometimes it’s not about the total return. Sometimes peace of mind and being comfortable with a strategy pays psychological dividends that can’t be measured in dollars. Nearly all mistakes people make with investing come from an emotional response rather than a calculated one.

So with that said, I recommended a financial advisor because I simply didn’t have the knowledge of the Supersystem at the time to comfortably steer them in the optimal direction. But I wanted to stay involved to make sure I understood the plan and everyone was on the same page.

The plan of attack was a pretty common one I guess for this type of situation. They were to sell off some properties and pay off the debt for the ones they had in the town they live in. The rent minus expenses alone for the remaining properties would be enough to fund their lifestyle. There was some other stuff done with super and pension phase but the main strategy was to sell down and live off the rent.

This was a perfect plan for my parents, especially my dad. He’s the sort of guy who can’t sit still and is always working on something. We have a family joke about giving him a ball of cotton and a toothpick and he’ll fix/make anything you want haha.

So basically dad spends most of his time improving the remaining properties that are all in town within a 5-minute drive and fixing them up if things break. It keeps him occupied and if you know him personally, you’d know that his idea of a perfect day is getting everyone together to work on a project like building a deck or ripping out a tree or building a new fence. All while the radio would be blasting in the background and him probably yelling at me for doing something wrong. That’s basically a snapshot of my childhood growing up and helping him with stuff haha.

So wrapping up this long-winded story, the retirement strategy my parents went down is completely different than the one I’m going down but it’s tailor-made for them and even comes with added benefits of meaningful work that brings joy and sleep at night factor.

Now back to your question.

Do you have a strategy for retirement?

Assuming yes, how comfortable do you feel about your strategy?

Could you easily explain it to someone you’ve just met and most likely answer all their questions they might have?

Are your parents open to learning about the market?

What is their risk tolerance?

You’re going to know them better than most, do they have the psychological mettle to keep cool calm and collected when the market crashes?

What you’re asking has a hell of a lot more to do with what type of people your parents are than it does about giving them bad advice.

FIRE or any retirement strategy, really, has been figured out a long, long time ago. The codes been cracked and it’s out there for everyone to use.

1. Save more than you earn
2. Invest in assets
3. Wait

Everyone has become obsessed about number 2 and what to invest in, but the truth is that it doesn’t particularly matter what you invest in, as long as it’s a good asset is the key. It could be gold, shares, bonds, property etc. but the really important step is number 1.

If I were in your position, I would offer as much education on the market as possible and it might even be worth booking in an appointment with a financial advisor. Boomers tend to trust professionals over financial blogs anyway and you’ll probably learn something about super along the way. It also takes heat off you in case there is a huge bear market and your parents freak out… But you’ll be there, of course, explaining that these things happen and should be expected and that the markets always bounce back!

I believe the key to a good retirement strategy really comes down being comfortable with it and full understanding of how it works. You’ll need to figure out what this is with your parents which can be done through an open conversation of the topic. If you get stuck, suggest they see a professional.

Hope that helps and good luck!

-AFB

Question (21:25)


What is your view on bonds in your portfolio asset allocation?

All the traditional advice is that 100% shares is not the best approach, yet I see over and over again people saying go 100% shares while you are young. Older, wiser heads that have gone through bear markets suggest a 60/40, 70/30 type split as a more responsible allocation.

What are your thoughts on this?

Do you plan to include bonds in your portfolio at one stage? Do you think a cash emergency fund or offset account for a mortgage is a substitute for the bond portion of a portfolio?

-Matt

Firebug’s Answer


Hi Matt,

Bonds have a place in some portfolios for sure.

It comes down to what risk tolerance and investing horizon. Would I go 100% shares if I were retiring at 65 with $1M? Probably not! I might want to smooth out the ride with some bonds and mitigate my risk against a bear market straight after retirement which would be my biggest issue.

You don’t usually see bonds in a FIRE portfolio because our investment horizon is decades and we usually have more options up our sleeve like returning to work which might not be possible for someone at 65+. Share historically outperform bonds but are more volatile.

There’s no right answer really and if you feel more comfortable with some bonds it ain’t gonna hurt.

Cheers,

AFB

Ask Firebug Fridays 23

Ask Firebug Fridays 19

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 (5:14)


Hello,

I saw this article pop up recently (link) from the co-author of Your Money or Your Life (a great read) and was wondering what your thoughts on this are.

Have you considered or planned on finding ways to give back to your community once you achieve the RE part of FIRE?

What would some of these ways be if you did?

I know a lot of people talk about RE to have the time to spend on hobbies and family, but it’s a rare thing to hear about giving our time to those around us and I think it’d be great to start that conversation in the FI community.

-Jackson

Firebug’s Answer


Hi Jackson,

Please excuse my tardiness with this reply being over 7 months old.

Your email made it into the ‘interesting questions’ folder in my Aussie Firebug inbox. I love all the questions I receive but often I will get the same question over and over again and I know the listeners out there won’t want to hear my opinions on them repeated.

With that said, the article you linked to was great and Vicki Robins has once again, articulated what many of the FIRE crowd will most likely end up doing.

FIRE sometimes gets a bad rep. It can be perceived to be selfish because there’s so much focus on building wealth that a few link this to greed. But from every single person I’ve personally spoken to and most I’ve messaged online, this couldn’t be further from the truth.

FIRE chasers are some of the most generous, environmentally conscious, selfless people going around and the majority give back from my experience.

I do have plans on giving back for sure!

In fact, I’m already creating content that thousands of people read/watch/listen to every month so in a way, I’ve already started. Now you could, of course, say that I’m receiving a financial incentive to keep this site running with my sponsorships and affiliates which would be a fair call. But I didn’t start this site with the intention to monetize it, it’s been an unexpected benefit for sure but I just absolutely love talking about FIRE from an Aussie perspective and would have continued to do so with or without the bonus income.

I have some big plans when I hit FIRE and come back to Oz, to really engage with the community more. I’ve spoken to the big guns at the premiere of Playing With FIRE and all the camps, financial conventions, group meetups sound like an absolute blast. I want to get involved in this and dedicate some of my time to get some stuff up and running.

Travelling around and teaching people about FIRE would be the ultimate ‘giving back’ activity for me. It’s such a natural progression too. I don’t really think I can call myself a master of anything except for when I hit FIRE. I’m pretty confident that after around ~10 years of talking the talk and walking the walk people are going to have faith that this dude know what he’s talking about when it comes to reaching FIRE in Australia. This blog is a testament to what can be achieved through discipline, delayed gratification and a touch of common sense investing.

I would also like to donate my time to various groups within my local community that are in desperate need of volunteers.

I would love to know what others are planning to do too. Please let me know in the comment section.

-AFB

 

Question (16:52)


Hi Firebug,

Love the site and podcast. I am wondering if it concerns you how popular passive investing is becoming and the impact of large amounts of money flowing into companies somewhat blindly?

Bec

Firebug’s Answer


Hi Bec,

This is a great question and one I’ve often thought about too. The thing is, there’s really no such thing as an ETF bubble. ETFs are tools, not catalysts.

They are a vehicle to give investors access to certain securities and sectors.

I guess it does depend on your definition of the word bubble in the context of investing and maybe the semantics of it.

Blaming a stock bubble on ETFs would be like blaming the invention of smartphones for Instagram, MP3s for Nickleback, or Television for the absolute abomination that was season 8 of Game Of Thrones (how could Dani not possibly see the ships from above???)

ETF just provide a different way to access something that was already there.

Nearly 100% of the time I have read about someone blaming ETFs for supposedly causing a bubble has come from a fund manager or someone who makes money from the belief that it’s better to be an active investor vs passive which has been proven time and time again to be a fallacy for the majority of investors.

The issue is that there’s a bloody ETF for everything these days including very bubble-like assets (think bitcoin). This gives the impression that it’s the ETFs themselves causing the bubble-like mania. But it’s never the vehicle that’s the bubble, it’s always the asset class.

You could argue that ETFs provide easier access to these bubble assets classes and help them grow. That would be a fair call. But you’d have to be pretty thick to invest in something just because it’s an ETF. I’d like to think the majority of investors look at the underlying assets they’re investing in before buying. And if the underlying assets are good, I don’t really see an issue with how ETFs make them available for us the investors to buy.

-AFB

Question (21:00)


Hi Aussie Firebug,

Thanks for the blog and podcast.

Like you, we plan on transitioning from shares and real estate to all shares, EFT & LIC.

To simplify things and increase income generation. We had planned on using one of the self listing options when selling our investment properties to avoid the agent’s fees, so we were interested to hear that you had done this with the sales of IP1.

Can you give us some details of the process and lessons learned? Will you do it again for IP2 and IP3?

– Bradley

Firebug’s Answer


Hi Bradley,

I’m glad you’re enjoying the content mate 😊

The company I used was called property now and I estimated that I saved around $15k by selling the property myself.

I got quoted something like 2.5% plus advertising fees which would have worked out to over $15k to sell IP1.

But I’m frugal AF so there ain’t no way I’m paying that much when there are tools available to do it yourself. I could save a heap of money and learn new life skills such as negotiating which I’ve always wanted to have a crack at.

Win-win.

You always are going to some people saying…

You should always let a professional handle stuff like that. It’s part of the cost of investing in property and they will be able to get a much higher price for you vs if you do it yourself.

I don’t subscribe to that line of thinking at all.

I would never pay that sort of money for a potentially higher selling price an agent could get me vs a guaranteed savings of ~$15k. There are other benefits that come with paying an agent which I’ll get into later but just know that no one will ever care about your house as much as you and this isn’t rocket science.

Sometimes I think people feel like you need a PhD in selling houses to list a property. They’re scared they’re ganna stuff something up but the reality is that’s it’s actually pretty straight forward and simple.

It’s a bit of work, there’s no getting around that. But like I’ve always said with property as an investment class, there are a lot more problems to be solved yourself vs shares which can be a good or bad thing depending on the type of investor you are.

The hardest part is knowing how much your property is worth. I used a subscription-based site called Price Finder to work out how much similar properties around the area were selling for. I have a family member who is a real estate agent so I was able to access her account for free which was nice.

That tool has an incredible map feature where you can select your house and set an area around it and it returns similar properties with how much they sold for. It even lets you specify things like the number of rooms/bathrooms/garage spots etc. I don’t know how they source their data but it’s pretty incredible that people can access it. Researching IP1 was easy for me because it was in a cookie-cutter estate where the houses are essentially the same.

Once you have your ballpark figure, photos of the property and some copywriting you’re ready to list it.

I wasn’t aware but you have to have a licence to list on the various websites like realestate.com and domain. Using a service like I did with Property Now lets everyone list for a fraction of the price.

Because let’s be honest. Does anyone go anywhere but the internet when they’re trying to buy a home these days? It’s not like real estate agents are useless. It’s just that technology has created tools that make selling a property fair more efficient than it use to be.

Think about it.

It wasn’t too long ago that real estate agents were the go-to people when you wanted to buy and sell a property. This makes sense too. They had built decades are trust with that area and simply had too many relationships and connections that you’d be mad to try to advertise yourself. They knew exactly all the avenues to go down and probably had deals with the newspapers etc. to ensure that all bases were covered.

I would have paid for that experience and connections if modern-day tools weren’t available.

But they are.

And IMO the fee structure for real estate agents have not caught up to 2019 and as more and more people start selling homes themselves, people will start to realise that it’s actually not that scary and I predict that it will become a lot more ‘normal’ in the years to come.

The process for selling a property yourself is as follows

  • Be prepared before you list online. Have you ball-park figure, photos, copywriting and conveyancer all sorted.
  • List on all the major sites (usually comes with a package)
  • Host an open day the first weekend it becomes listed
  • Sell when you find a buyer
  • Nearly all the companies that provide this sort of service have a really good cheat sheet in case I missed anything but that’s the gist of it.

There are a few things I would do differently if I had my time again though.

  • Pay the extra money to have your property featured as a ‘premium listing’. It’s the most expensive option (around $1,000 from memory) but it pales in comparison to what the agents charge you and it’s supercritical in a high demand area like I found out with my property.You ideally want to have the house sold within the first 2-3 weeks. Paying for the premium listing means your property jumps to the front of the search results for your area. It’s similar to having your webpage ranked high in Google.It can be the difference between you getting swamped with calls or having no one show up to your open day.
  • Know your ‘number’ before you list and stick to it! I actually had an offer that was over my reserve and more than what I eventually ended up selling it for within the first 3 days.Like a classic greedy idiot, I decided to wait a bit because my phone was blowing up and I had a lot of interest on the open day. Well a week later I had all my offers and that first one was still the best. I went to ring the party and what do you know, they had their offer accepted for another house.Lesson learned.I should have drawn up the contract ASAP when someone offered me some at or above what I was willing to sell for. Trust me, you start to play the ‘what if’ game when your property gets a lot of interest. But the hottest time for your property will always be the first week or two. After that, it fades… a lot. I had to wait another 4 weeks until I found another offer and your minds starts to play tricks on you once the buzz from the first weeks dies down.
  • Really put in the work in the first two-three weeks. Open houses every weekend. You don’t want your property to still be sitting there after a month. It can be viewed as stale and what a lot of people do is pay the package again to have it ‘relisted’ so it jumped back to the top of the search.Don’t be in this boat.Make sure your ‘number’ is reasonable and within the range that houses similar to yours are selling for. Shake the hand of the first person that offers your ‘number’ or higher and be done with it.
  • This one is so controversial but it has to be said.Underquoting.This is when people list a property at a price that they have absolutely no intention of selling it for.Why do they do this?

    To attract a lot of attention and hope someone falls in love with the place I guess.

    I’m pretty sure it’s meant to be illegal but everyone does it. I made the stupid mistake of actually listing my asking price and still to this day I think my attendance rates suffered because of it. I was watching the sales of similar property around the corner from mine selling around my asking price, being listed $40k-$50k cheaper than mine.

    The most depressing this is that the buyers expect this to happen and I even had one bloke stumble across my open day and asked me what my reserve was. I said it’s what it’s listed at mate but he insisted that he actually wanted to know the real price. I told him again that it what it’s advertised at. He said that he had family who were looking to buy in the area and didn’t bother coming to my property because it was listed so much higher than the others.

    🙃🔫

I really enjoyed the lessons learned from selling IP myself. I will definitely be doing it again in the future where it makes sense.

I will use an agent if it needs to be done. Like right now, it wouldn’t make sense for me to fly back to Australia to host a few open days for IP2 and IP3. The commission fees are going to be a lot lower for those properties because they aren’t worth as much as IP1 was too.

They aren’t listed yet but the lending market is on the upswing and I’m watching that space very carefully.

Another thing I want to mention is that you really need to be the right person to sell a property yourself. You need confidence, especially when it comes to negotiating. I wish I could say everyone has this because it’s such a valuable life skill when it comes to a whole bunch of stuff.

But if you’re the sort of person that gets anxiety thinking about asking for a raise, bartering with the locals in Bali or trying to wheel and deal the best combo of Shinies you can score for your ultra-rare Charizard then maybe it’s worth paying for someone else to do it.

And that about sums it up Bradley.

Agents have their place and can be useful for sure, I may even end up using one out of convenience sake. But the internet has open up doors that were not there previously and you can definitely save a lot of money doing it yourself.

We’re the FIRE crowd after all. We thrive on the challenge of doing it ourselves amairight?

Hope that helps.

-AFB

Ask Firebug Fridays 18

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 (3:52)


Hello,

I have found a lot of information in regards to paying off a mortgage vs investing. However, I cannot find much to match my circumstances and am hoping you could shed some light.

I live with my father and have a very low cost of living. I have an investment property and also invest in Vanguard index funds.

If I lived in my property I would prioritise investing in the equity funds over paying extra on the home loan. My question is would there be anything to think differently about if the property is being used to create income as an investment rather than a debt burden if I was living in it? Is there any reason to prioritise paying extra on the mortgage?

Thank you,

Steven

Firebug’s Answer


Hi Steven,

It depends on a few things.

Is your IP’s loan interest only or P&I? I have recently changed both my I/O loans into P&I because the difference in interest rate between them has reached a level so great that it’s only around $150 extra per month to switch to P&I. This comes with the added benefit of actually paying down the loan too.

This was the intention from APRA when they had a crackdown on I/O loans. I didn’t want to switch to P&I because like you, I would rather invest in the market vs paying off principal. But there comes a point in interest repayments when I had to make the switch. Touché APRA.

Take a look at the rate you’re paying and work out how much you could save in interest if you switched to P&I.

The other part to this puzzle for most people is their risk tolerance and how they react to bear markets. It’s very safe to simply smash out a mortgage ASAP. Some people can’t sleep at night with a lot of debt to their name.

Mathematically speaking you’re historically better off not paying extra off your loan but instead investing that surplus into the stock market.

Just make sure that if you do have extra to put in, dump it into an offset and not against the loan. This is for tax-deductible purposes and may help you later on if you decide to use that offset money elsewhere. A redraw and offset are not the same things!

-AFB

 

Question (11:27)


Hey,

First of all, thanks for the great content!

I wanted to know if you have any posts on super or any advice on what to do with your super account for early retirement? Do you have an SMSF or do you go through a specific super fund? Basically, I want to know what I can do to optimise my super. I live in QLD and I’m with Qsuper.

Thanks,

Jack

Firebug’s Answer


Hi Jack,

This was one of my goals for 2018, to write more about Super which I have failed miserably 😞

I tried to get a Super expert on the Podcast but just kept on getting the run around with them. I was close to getting Trish Power on from superguide.com but I couldn’t lock in a time and date. She’s a busy woman!

I just have so many other things to write about that Super got a bit neglected, unfortunately.

I’m personally with Vision Super and Mrs FB is with VicSuper. I’ve heard great things about HostPlus and recently, Rest Super just released investment options where they charge 0% in management fees. You still have to pay the underlying fees but usually, Super funds charge their own fees on top of that so it’s a pretty sweet deal if you ask me.

Super can bundle other things like life insurance so make sure you do your own research and compare apples with apples.

-AFB

Question (15:20)


Hi Aussie Firebug,

Thanks for your Great work on the blog and podcast.

I wanted to ask about your move to Strategy 3, I think I understand the logic behind it and what you’re looking to achieve.

If I can play devil’s advocate, wouldn’t it make more sense to invest in higher growth indexes for now (e.g. US Markets/VTS has massively outperformed ASX/VAS/A200 over the last 10 years even allowing for dividends), as this would grow your net wealth and allow you to achieve FIRE earlier. After that, you could sell VTS/VGS, convert to dividend paying shares and LICs, and live off the passive income?

Key point being, while you’re working and not reliant on the dividend income, growth stocks/Index funds would allow you to grow the pie larger and more quickly. Once it’s at a sufficient size where the equivalent value in Aus dividend stocks/index funds would pay enough passive income to live off you would sell and convert right?

Cheers and thanks for your time.

Rando

 

Firebug’s Answer


Hi Rando,

In a perfect world, this is exactly what I’d be doing. But unfortunately, our world and financial markets are far from perfect.

What you’re suggesting here is to basically try and time and market. Which is really, really hard to do. The biggest risk is a big bear market just before retirement. If the markets tanked (ironically they are plummeting each day as I type this), it could delay our retirement date by years. I’m more comfortable with strategy 3 even if I have to work a year or two more to get to the end goal.

It’s ironic that you mentioned VTS too because it has had a very rough trout during the last few months

aff18

Could you imagine my disappointment if I was going to retire in 2019?

Having said all that, I do hedge my bets a little with VTS and VEU. But the focus for now in the Australian market.

-AFB

Australian FIRE Calculator
Send it!
close-link
Get Calculator!
Get FREE Aussie Firebug updates, tips and tricks, and exclusive content!
Subscribe
No spam. Unsubscribe anytime.
close-link
Subscribe
Subscribe

Stay Connected!

Join others who get FREE Aussie Firebug updates, tips and tricks, and exclusive content!
SUBSCRIBE
close-link