Aussie Firebug

Financial Independence Retire Early

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

Ask Firebug Fridays 17

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 (3:58)


Hi,

Have you had any success explaining investing to friends? I am 28 and have a number of friends who don’t really invest at all, preferring to keep their money in the bank. I don’t want them to miss out on all this good compounding but I can’t sell investing to them.

-Luke

Firebug’s Answer


Hi Luke,

I have never really tried to ‘sell’ investing to anyone. The only person I’ve actively tried to teach the value of investing to is Mrs. FB because we’re a team and doesn’t work if one party is not on board. Other than that I never really talk about investing in the real world unless someone asks me about it.

What I’ve found extremely interesting is when the topic of investing actually does come up amongst friends or family, most people seem to be engaged and genuinely interested. Imagine that, a topic that most people like talking about and want to know more is view as a taboo and is cloaked with secrecy.

I mean, the number one selling book in the country is about money.

When someone is brave enough to actually bring up the forbidden topic of money and investing, suddenly everyone’s an expert. This is doubly so when it comes to property investing.

EVERYONE has a hot tip and opinion as to what the next suburb to boom will be. People that have 0 skin in the game can rant on for hours after a few beers why BitCoin is the next internet and everyone needs to get on board.

Yeah, yeah, yeah mate. I’ve heard it all before. Talk to me when you have actually dropped over $10k into this golden goose and you’ll get a bit more of my attention.

If I was to give a practical answer for trying to get people to understand the power of compound interest, it would probably be through books. ‘Rich Dad Poor Dad’ did it for me, but there are plenty of other modern ones out there. If someone can honestly read through a good general investing book and still not get it, they probably never will.

-AFB

 

Question (10:33)


Hey,

Considering the market turbulence this week and the concerns around the possibility of a Labor Government win and removing Franking Credits refunds… Will your investing strategy remain the same for the next 12 months? Or are you planning on adapting to suit market conditions?

Do you Dollar Cost Average or save up to buy in the market dips?

Thanks,

Daniel

Firebug’s Answer


Hi Daniel,

This is a very good question and something that’s been on my mind more and more. There are a few pieces at play here and I don’t usually like to speculate on future policies.

The current laws in place right now (including the franking refund) mean that an income stream from Aussie franked dividends is the best strategy for us to reach financial independence and retire early.

We as investors, can and should make decisions based on facts and not on speculation.

Having said that, I do tend to think that the abolishment of the franking refund is very likely to get through the Senate which has a big impact on the majority of the FIRE community if you’re planning to live on franked dividends (which we are).

You can read about how big of an impact in this fantastic article from Aussie HIFIRE.

If this change goes through, the biggest reason why we invest in Aussie shares, to begin with, goes out the window. The plan is to generate around $40K which is split between Mrs. FB and I, meaning we would have $0 tax to offset against. Not being able to get the franking credit refund once we hit FIRE is essentially the same as not benefiting from franking credits altogether (for our circumstances).

And if I take out the franking credits, suddenly Aussie shares look way less attractive. We are giving up global diversification to take advantage of the uniqueness of Aussie shares.

If they take this ‘X-factor’ away. We will be re-evaluating the strategy and most likely will go back to something similar to strategy 2.

We’ll cross this bridge if we come to it I guess.

We DCG around $5K a month but with the cash we have from selling IP1, we have been drip feeding $15K a month into the market. We will continue this over the next 18 months.

Cheers,

-AFB

 

Question (20:22)


G’day AussieFire Bug,

Been smashing your podcasts over the weekend and got through about 3/4 of them. They have been amazing.

What are your thoughts on private health insurance? Do you find it worth it? I know it does reduce the Medicare levy by a little, but is it worth it?

Thanks AussieFire Bug,

Michael

Firebug’s Answer


Hi Michael,

We personally don’t have private health. I did once upon a time when I wasn’t a defacto with Mrs. FB for tax purposes. I use to have it to reduce the levy but combining our salaries puts us under for a couple.

I’m happy to use the public system during our 20’s and without kids. Once we hit 30 and have kids we will most likely buy private health.

I’ve chatted to many at work who have always gone through the public health care system and it worked fine.

Just remember to buy ambulance cover. That is a non-negotiable and only cost around $65 for a couple. A mate at footy once had to go to the hospital in an ambo and it cost him something like $3K.

HomerAmbo

Ouch!

-AFB

Ask Firebug Fridays 16

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 (3:00)


Hi Firebug!

Loving the content and hearing all the great questions from listeners on Friday’s, keep up the great work. I’m hoping to hear your opinion or what you would do in my shoes if possible 🙂

My husband and I are 36 with a 2 &1/2-year-old and thinking about expanding our family because you know by this point sleep is a distant memory anyway!

We’ve got a nice emergency fund, zero debt and have just started to invest in ETFs. Super is currently sitting at about $150k. Right now we’re really fortunate to have free housing but are keen to get into a place of our own as we can’t stay here forever.

We keep going back and forth between what’s best to do which is where I’m curious to hear what you have to say.

We’re currently saving towards a house deposit and looking to have about $100,000 saved before we buy in SA. Until we reach that goal in approx 2 years our plan was only to invest about $5k a year into ETFs. But we’re not sure if we should beef up that amount we’re investing instead of saving so aggressively for the house because we’ve had investing on pause for 2 years while we cleaned up debt and got an emergency fund together.

One of the things that drives me nuts is the brokerage fee with such a small quarterly trade, but hey what can you do (I plan to get on to using self wealth this month!)

What do you think you would do in our position, and why?

-Amy

Firebug’s Answer


Hi Amy,

Ahhh kids… As aspiring parents (one day) Mrs FB and I are really taking advantage of weekend sleep-ins. I’m not sure how she’s going to cope tbh, she regularly puts away 9-10 a night 😂.

Now to your query.

Firstly, you’re in a really good position for a couple in their 30s:

  • No debt ✅
  • Emergency fund ✅
  • Super balance over $100K ✅
  • Reads aussiefirebug.com ✅✅

I have no idea how you’re getting free housing but milk that bad boy for as long as possible. Housing is one of if not the most expensive item anyone will pay for in their entire life. Living at home until 26 was probably the biggest advantage I had to increase my net worth so young.

It depends what you’re after, but from what you’ve written in, it appears that you want to start investing outside of Super whilst also saving for a house deposit. If I were in your position, I would concentrate on the house deposit and not worry about investing until you’re in your next home.

The other question you need to ask yourself is do you plan to retire before 60? If the answer is no, Super is the best vehicle to invest in because of the tax advantages. You can swap Super providers and invest in ETFs directly through them. A popular choice in Hostplus Superfund.

If you really want to start building that snowball outside of your Super you could either trade through a broker such as SelfWealth as you’ve mentioned. Or you could sign up with Vanguard directly and invest smaller amounts without paying the brokerage cost. You will be paying higher management fees though…

Hope this was of some help and good luck on your journey 👊

-AFB

 

Question (11:33)


Hi Aussie Firebug,

I just came across your blog as I was searching on how to buy Vanguard Index funds (VAS, VGS) Thank you so much for your blog, you made it very easy for me to understand.

Just 2 quick questions:

1) I am single, no kids or dependents. Would u recommend buying EFTs through a trust or just under my name? Is there any tax benefit when buying EFT’S thru trust in my situation?

2) From what I’ve read on your blogs, VGS is domiciled in Australia so I don’t have to pay taxes outside Australia. Is this correct? Based on your strategy, I might invest VAS 40% and VGS 60%

Looking forward to hearing from you.

Thanks a bunch!

Jonathan

Firebug’s Answer


Hi Jonathan,

I’m glad you’ve found my content easy to digest. Simplicity and ease of use have become a bigger part of my decision making in recent times which also reflect my answers to your questions.

  1. There can be. But the most realistic tax minimization strategy from trusts for most people will be when their wife isn’t working if they have kids and income can be distributed to her. That and distributing to other family members who don’t have an income. If I were in your situation I wouldn’t bother to set one up. You don’t need it.
  2. You’re correct. You also get the added benefit of not having to fill out a  W-8BEN-E form. VAS and VGS, in my opinion, is a great diversified portfolio.

Cheers,

-AFB

 

Question (20:07)


Hey Aussie,

I made an observation today which I thought was interesting. All the main indices were down (ASX200, All Ords, ASX200 Financials, ASX200 Materials, ASX200 Industrials) yet all the larger LICS I track were up (or in the case of AFIC, was flat).

Thoughts on this?

Regards,

Michael

Firebug’s Answer


Hi Mick,

I noticed this the other day as well which intrigued me so I started to do some investigating.

The larger LICs like AFI, MLT and Argo have a heap of crossover from the ASX300 which should, in theory, mean that their price is closely linked.

If we compare VAS to AFI over the last 10 years or so we get this graph.

VASvsAFI

I’d say that looks pretty much how I thought it would. There’s definitely some correlation between the two. They rise and dip mostly the same.

One reason I have read that would explain why ETFs can drop further than LICs in a bear market is because LICs seemed to attract more long term investors who don’t get spooked by the market. This is reflected in the share price and could explain why the LICs didn’t suffer as much during last month.

Just a guess though. Maybe someone smarter than me could comment down below.

-AFB

Ask Firebug Fridays 15

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 (2:10)


Hi AFB,

Love the site and podcast!

Quick question around Trusts. My understanding, which may be wrong, is that the costs to set up and manage one, out way the benefits unless you have a sizeable portfolio ~$500k+.

I’m keen to buy some ETFs for the long term with a goal of having a portfolio in excess of $1.5mil however that likely won’t be for ~15years. With that in mind should I buy now under my own name, or set up the trust with the future in mind even if the costs outway the benefits during the early stages?

If tax bracket matters I’m in the 37c per $1 and also know the government are proposing changes to trusts and franking credits. How does that impact the decision?

Thanks
BillyBob

Firebug’s Answer


Hi BillyBob,

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

Trusts can technically save you money but as you’ve mentioned, they cost a bit to set up and manage.

I don’t think the Bill Shorten’s proposed trust tax reform will get through if I’m being honest. The simple reason is that the vast majority of the rich and powerful hold their assets in a trust and all the big political players up the top never change laws that would make them and their lobbyists poorer.

It’s never good to base your investing strategy around tax laws (as they are always changing), you always want to invest predominately in great companies first and foremost. The tax efficiencies are less important.

Having said that. What I’ve come to realise during my 5-6 years on the path to FIRE is the power of simplicity. Creating and running a trust creates a complexity.

Can it say your money…Yes.

Is it necessary?… Nope.

-AFB

 

Question (11:12)


Hi AFB,

Love your work and the podcasts.

Like many of us, you started in property because of the high amount of leverage you can use. As your goals changed due to changes in lending and increased sharemarket knowledge you’ve mentioned divestment of your investment properties.

1. What is your strategy for the divestment and what do you have as key considerations for this?

2. If you had a PPOR and one property paid off and another 2 (duplex) well underway (7 years to go) would you simply stick with property as many of the entry costs have already been incurred?

Thanks

Seamus

Firebug’s Answer


Hi Seamus,

It’s true, I started with Australia’s favourite asset class. Good old, never fails, always goes up… bricks n mortar.

In a weird way, I’m almost glad I hit my landing wall so early in my journey. I may never have had to find an alternative path to financial freedom and ultimately discovered the sharemarket.

To answer your questions:

  1. The biggest consideration is that we don’t want to sell low or in a bad market. And right now is a terrible time to sell because nobody can get loans! We might be waiting many years before the banks loosen lending again but the two properties are cash flow positive so there’s no reason to rush.
  2. No I wouldn’t. Property can be a good wealth builder. But its cash flow is terrible compared to shares. It depends what you want and where you are in your journey. But if you’re closer to the end and want to start living off passive income, shares are superior to property IMO.

Cheers,

-AFB

 

Question (18:30)


Hello AFB!

So Vanguard has a new ETF that has caught my eye… the VESG, apparently its ethically focused and doesn’t invest in stuff like weapons, tobacco and fossil fuel.

I have had concerns from time to time about investing in products that I would otherwise avoid buying as a consumer but I had put that one on the self an gone down the VTS/VEU route anyway.

Do ethics play into your investments strategies? How so? What do you think of the VESG as a core holding?

Happy Monday!

Thanks Kindly,

Emma

Firebug’s Answer


Hi Emma,

Ethically focussed investments are a relatively new product. I always thought of them as paying a premium to invest in something that aligns with your values. But they are actually picking up steam and more and more younger investors are prioritizing companies that are not related to fossil fuels, gambling, pornography, tobacco, animal testing for cosmetics etc.

Check out the rise of ethical investing in Australia

EthicalInvesting

Source: Responsible Investment Association Australasia (https://tinyurl.com/y8bgy8ye)

It’s not dissimilar to free range eggs. Consumers have proven with their wallets that they are willing to pay more for a product based on ethics.

Having said all that, ethical investing is not something that is at the forefront of my mind when I buy assets. But I must admit when I went down the rabbit hole and starting Googling ethical investing, I was pleasantly surprised with the overwhelming data that this is a growing area and maybe it’s something I should look at more seriously in the future.

VESG for a core holding isn’t too bad actually. It has over 1,500 holdings from all over the world (a bit heavy in the states at 61%) but it’s a lot more diversified with an acceptable management fee of just 0.18%. Not bad Vanguard, not bad at all.

It’s not quite hitting the mark for me just yet but if ethical investing is important to you, VESG looks to be a fine choice.

-AFB

Ask Firebug Fridays 14

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 (2:19)


Hi AFB,

Wondering if you could explain your thoughts re: dividend approach to investing.

My understanding is that when a dividend is paid to investors, the company’s assets are reduced by the same amount. This in turn reduces the share price by the same amount as the dividend.

If this is correct, what is the value of focusing on dividends? The only logic I can see is that once one hits FIRE, they can receive an income without the need to sell shares. Seems ok, but not a particularly compelling reason to concentrate assets to a particular market – in this case, Australia.

Love your website and podcast, and hope to hear your thoughts on this.

Cheers,

Clinton

Firebug’s Answer


Hi Clinton,

Your understanding of dividends and their relation to share prices are somewhat correct. In simplistic term, if a company makes $100 from their asset their share price should reflect this cash asset. If they pass on this cash to the shareholders in the form of a dividend then you would think the share price would drop accordingly. This does happen after most ex-dividend dates. But share prices are always affected (good and bad) from human emotion.

Our switch to strategy 3 was mainly due to the nature of dividends and their link to intrinsic value.

The thing is… when you are relying on selling any part of your portfolio in retirement to survive, you are at the mercy of the market.

The main reason that strategy 3 ultimately won us over was the fundamentals of a business is less affected in a crash than the share price.

A business and its share price are largely tied to its ability to produce a growing income. There were many businesses back in 2008 that were not affected greatly by the GFC in terms of the bottom line. But the ass fell out of the share price because human emotion got involved. Sure the dividends may have dipped, but nowhere near the same level (in terms of percentages) as the share price. This is because the dividends are tied back to fundamentals and how much income the company is able to produce, not based on how many inexperienced and ill-informed investors are rushing for the exits after reading a doom and gloom article in the Herald Sun.

I feel a lot more confident that Strategy 3 will hold up through thick and thin vs Strategy 2 even though Strategy 3 could delay our fire date. This is because even in a recession, good income producing companies will still do just that, produce an income. And seeing those dividends hit the account each quarter will help immensely.

-AFB

 

Question (11:34)


Hi Aussie Firebug,

I’m in my 30’s, and I’m looking to begin investing my money for future long-term growth.

I’ve read on the internet about ‘ready-made portfolio’s’ (my super company BT offers this).

Do you know how they differ from managed funds? Both appear to invest in assets like eft’s, shares etc, but just a bit unsure how they differ.
If you know of any information that you can share, please let me know.

From Matt, an Aussie Firebug follower, and FIRE aspirant.

Firebug’s Answer


Hi Matt,

While there’s no real definition of a ‘ready-made’ portfolio, they usually are a managed and diversified portfolio that has levels of risk that the investor can choose depending on their needs and risk profile.

They are basically managed funds within your Super.

The ‘managed’ part usually refers to the fund managers ability to balance the portfolio how they see fit depending on what the goals of the portfolio. If you invest in a globally diversified ETF portfolio yourself such as A200, VEU and VTS. You would, of course, be in charge of the weighting and rebalancing.

A management portfolio takes care of this for you and your only job is to pick which fund is right for you.

It’s not a bad option, but like most things, the devil is in the detail. Your Super Fund BT charges a management fee of 0.42% on top of the underlying fund’s management fee. They also charge 0.22% in transactional and operational costs. So you’re looking at a management fee of around 0.64% plus the underlying fund’s fee.

Vanguard offers a diversified index ETF for a management fee of just 0.27%. This includes professional management of a diversified portfolio and rebalancing is taken care for you.

Vanguard Diversified ETFs

But you’re always going to have to pay a bit extra because it costs money to run a Superfund.

My question to you would be when are you planning to stop working? Super is the most tax efficient vehicle in Australia but it comes at the cost of not being able to access it until later in life and thus ruling out early retirement.

-AFB

 

Question (20:17)


Hi AFB,

Thanks for your informative blogs and podcast. I’ve been following you for a year now and you’ve been such an inspiration! Keep up your content!

I’ve just recently purchased my first investment property and was just wondering although it’s too late but what are some of the key points that you look for when purchasing a property and which suburbs are your properties located in?

Thank you!

Edmund

Firebug’s Answer


Hi Edmund,

It depends on what sort of property investor you are. I have been to many property seminars and met countless investors. But a trend I continually see is that most successful property investors have a niche that they are really good at and get better over time.

The most common investor is a buy and hold investor. They are hoping that the market will outperform inflation and through the power of leverage amplify their gains.

Other types of property investing include:

  • Subdivision
  • Development
  • Renovation
  • Commercial
  • Vendor Financing
  • Flipping

Each has their own pros and cons and we could be here for hours explaining what is needed for each to be successful.

The most important things to look out for when it comes to investing in real estate IMO are:

  • Getting a bargain when you buy. Super important because it gives you an instant buffer and equity straight away
  • Cash flow. The lifeblood of the investment.
  • Economy around the area. Where are the jobs coming from and is this industry growing or shrinking? Population is also part of this equation
  • Opportunity for growth. Are there upcoming projects scheduled? Is the population forecasted to increase, decrease or stay the same? Why?
  • What is your exit plan? Who are you going to sell to in the end and why are they going to want to buy your investment

Those were the basic things I looked at when buying to invest.

Our two properties are located in SE Queensland.

-AFB

Ask Firebug Fridays 13

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

 

 

Question (3:10)


Hi AFB,

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

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

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

Thanks,

-Derek

Firebug’s Answer


Hi Dereck,

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

-AFB

 

Question (8:54)


Hey AFB,

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

Andee

Firebug’s Answer


Hi Andee,

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

-AFB

 

Question (12:45)


Hi Mate,

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

Keep up the good work my man. Loving it.

Cheers,

Ryan

Firebug’s Answer


Hi Ryan,

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

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

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

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

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

-AFB

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