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10 Lessons I’ve Learned from 10 Years Pursuing Financial Independence

10 Lessons I’ve Learned from 10 Years Pursuing Financial Independence


Reflection time.

I started full-time work at the end of 2011 and discovered the concept of financial independence (FI) sometime in 2012 after reading Rich Dad Poor Dad by Robert Kiyosaki.

That book (and the concept of FI) changed my life.

It wasn’t until a year after reading that book that I stumbled across Mr Money Mustache and the FIRE movement, which again, changed my life.

10 years. That’s how long I’ve been chipping away at this goal. And a lot can change ya know. My mindset, goals, strategy, desires, priorities have all shifted throughout the last decade. I’ve been thinking a lot about the lessons I’ve learned throughout the journey. What worked? What didn’t? What’s the point of it all?

Let’s get it.

 

1. The ultimate goal is to be happy. Never lose sight of this

We’re starting this list with the most important lesson.

It’s a bit philosophical but it’s really important and it sets the tone for everything we do. Have you ever asked yourself the following question and really mulled it over?

“What do I want in life?”

Now, there are going to be thousands of different answers to that questions depending on who you’re speaking to but the common denominator will always be the same… a desire to feel joy/to be happy.

Going snowboarding is pretty obvious. That’s fun as hell! But going to the gym 3 times a week and lifting heavy shit is… less obvious. One involves instant gratification whereas the other is delayed by a series of uncomfortable painful sessions.

The driver and end result for both activities is still the same. To be happy.

This driver for happiness is behind nearly everything we do. But figuring out what sort of life is going to be fulfilling and bring us purpose is a personal journey. The sooner you identify the key drivers of your happiness, the quicker you can start to plan out your ideal life.

I know life sometimes feels really complicated and stressful but at the end of the day, we’re still just another animal on Earth whose needs and desires haven’t changed that much over the ~50,000 years we’ve been roaming around.

In 1943 an American psychologist called Abraham Maslow published a paper called “A Theory of Human Motivation” which included the now very famous Maslow’s hierarchy of needs.

Maslow’s hierarchy of needs

This hierarchy of needs is universal and transcends generations.

A spice merchant in Ancient Egypt 3100 BC would still need to cover each level on the pyramid (pun intended).

Start from the bottom and work your way up and don’t skip over the physiological needs either.

You’d be surprised how many people would feel 10X better by just getting a decent amount of sleep each night and eating the right foods.

How FIRE plays a part in helping you achieve a level of happiness can be explained better in lesson 2.

 

2. Find your why of FI

One of the biggest mistakes I have personally made and that I see all the time is people thinking that reaching financial independence will make them happy.

Spoiler alert. It doesn’t.

You need to find your ‘why’. Why do you want to reach FI? What will reaching FI mean for you? How will it make you happy?

Speaking from personal experience, FIRE resonated with me because whilst I quite enjoyed my job, I resented the fact that I was ‘stuck’ there 5 days a week. I didn’t like that feeling. And before I knew that FIRE was even a thing, I thought I was going to be in the cubicle for 40+ years 🤮

FIRE for me was about gaining more of the most precious resource we all have. Our time!

Free time is crucial for satisfying the top level of Maslow’s pyramid.

Money is just a man-made abstraction that doesn’t have any intrinsic value. We can leverage money to create more time and freedom in our lives. The most important part is knowing how to use this extra time and freedom to enrich our lives. Having a rock-solid ‘why of FI’ will help tremendously throughout your journey.

 

3. Master behaviours, not spreadsheets

This lesson took me many years to learn but it’s a goodie.

At the start of my journey, I was really attracted to the math and statistical side of FIRE. I loved reading about the Mad Fientist’s tax strategies (even though they were US based), MMM’s shockingly simple math behind early retirement and how the trinity study modelled over 80 years of data to come up with the 4% rule.

I used to seriously whip out the calculator on my phone at all hours of the night to crunch some number because I was obsessing over a 0.07% difference in management fees lol 😅.

But the further down the FIRE rabbit hole I traverse, the more I realise that spreadsheets, modelling and the math behind money management all meant diddly squat if your emotions and psychological makeup are not equipped to stay the course throughout your journey.

I’m not saying the numbers don’t matter, because they most definitely do. But our behaviours matter more.

“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know”

– Morgan Housel

There’s a great story that illustrates this point perfectly. In the intro of one of my favourite books, ‘The Psychology of Money’ by Morgan Housel. Morgan compares the stark contrast between an American Janitor called Ronald Read with a Harvard-educated Merrill Lynch executive named Richard Fuscone.

From his wiki page:

Ronald James Read (October 23, 1921 – June 2, 2014) was an American philanthropist, investor, janitor, and gas station attendant. Read grew up in Dummerston, Vermont, in an impoverished farming household. He walked or hitchhiked 6.4 km daily to his high school and was the first high school graduate in his family.

Read repaired cars at a gas station for 25 years and was a janitor at JCPenny for 17 years. He purchased a 2 bedroom house for $12K in 1959 and lived there for the rest of his life.

Friends of Read have been on record saying that he didn’t really get up to much. Some said his hobby was wood chopping and he lived a very low key life.

Read died in 2014 at the ripe old age of 92 which is where the plot thickens… Read made international news when he left over $6,000,000 (USD) to his local hospital and library. He also left over $2,000,000 to his stepkids too 🤯.

Read’s friends were dumbfounded. Where did he get all that money from?

Friends and family went looking for answers but they discovered there was no secret.

No lottery wins.

No hidden inheritance.

No hidden high paying secret spy job that he’d been keeping under wraps.

Read simply spent less than he earned and invested the rest in blue-chip stocks. The power of compound interest over decades did its thing and his low-income modest lifestyle managed to create a snowball worth more than $8M (USD) 🤯🤯🤯.

Ronald Read

Richard Fuscone was in the news a few months before the passing of Ronald Read for very different reasons.

Fuscone is basically the polar opposite of Read.

To say he’s well educated is putting it lightly. Check this out for a resume

I mean damn! That’s some serious alumni. And for those who don’t know, the University of Chicago offers one of the most prestigious MBA programs in the world. We’re talking about the upper echelon of prestigious education here.

Fuscone was a high flying executive who retired in his 40’s to pursue philanthropy and was once included in a “40 under 40” list of successful businesspeople. Fuscone got into financial difficulty in the mid-2000s after he borrowed heavily to expand his 18,000-square foot home that had 11 bathrooms, two elevators, two pools, seven garages, and cost more than $90,000 a month to maintain.

Then the 2008 financial crisis hit.

High levels of debt coupled with illiquid assets left Fuscone bankrupt.

A few months before Ronald Read passed and left his fortune to charity, Richard Fuscone’s home was sold in a foreclosure auction for 75% less than an insurance company figured it was worth… ouch!

Ronald Read was patient, Richard Fuscone was greedy. That’s all it took to overcome the enormous education and experience gap between the two.

So what’s the moral of the story?

It’s not about how smart you are, it’s about how you behave.

 

4. Getting wealthy is simple. Don’t overthink it

“Life is really simple, but we insist on making it complicated.”
– Confucius

Almost every single wealth-building strategy can be boiled down to three steps:

  1. Spend less than you earn
  2. Invest the surplus
  3. Wait

That’s it… seriously.

Now there’s an absolute chasm between ‘get rich quick’ schemes and long term investing but those three principles hold true 99% of the time. How you invest and what you invest in doesn’t particularly matter. As long as you’re outpacing inflation and have strong conviction in your investments you should be moving towards financial independence.

Fidelity Investments is a multinational financial services corporation based in Boston, Massachusetts. An interesting discovery was made when a customer account audit revealed that the best investors in their database were either dead or inactive.

How could that possibly be?

How could someone that’s not adjusting their portfolio to the macro and micro economic news, outperform savvy investors with all the latest up to date data at their fingertips?

Well, it turns out that when it comes to investing… less is more.

Which is very unintuitive and goes against basic logic.

See the thing is, almost no one can beat the market over the long term. But people (myself included) constantly fall for the trap of trying to add complex financial instruments to somehow gain an advantage over ‘unsophisticated’ investors. I’ve always been raised that you need to put in the effort to reap a reward. You have to work hard to get anything in life worth having. This is true for most things… just not when it comes to investing.

I created and now invest through a trust fund because I associated its complexity and mystic with higher returns.

I thought I needed to do something different. I needed to outwork others to have a good return.

Choosing an ordinary index fund and adding to it each month without doing anything else just felt…lazy lol. I had all this pent up excitement after discovering FIRE and I wanted to channel this energy into the journey. I wanted to work my ass off so I could reach FI as quickly as possible and I felt like boring lazy index investing is only for people who aren’t willing to put in the work. It’s taken me years to accept that not only is this approach perfectly fine, but it’s also statically the most optimal choice most investors can make.

Keeping it simple also frees you up to concentrate on what’s really important in life which ties into the first lesson, to be happy.

Complexity has the potential to steal your most precious resources; time and energy.

Money is the slave that works for us, not the other way around.

 

5. What’s measured is managed

If I could give only one tip to anyone looking to be better with their money, it would be to start tracking your expenses.

That’s it.

You don’t even have to do anything else. I promise you that you’ll save money and optimise your expenses within the very first session. You might think that you know what you spend money on but I’ll bet the house that the first time you analyse three months of expenses, you’ll be surprised.

This lesson falls under the umbrella of Lesson 3 ‘Master behaviour, not spreadsheets’. It’s been well documented that keeping track of any metric and reviewing it regularly has a psychological effect on humans that can help us improve a focus area.

If a sprinter wants to be faster, they’ll keep a record of how fast they run.

If a presidential candidate wants to become the president, they’ll record and analyse poll data with their team.

If Tesla wants to design self-driving cars, they’ll create, test and record different algorithms continuously and keep track of what did and didn’t work.

I think you get the idea.

What’s measured is managed!

And if you’re not measuring the most fundamental aspect of FIRE, you won’t be able to manage it effectively. Plenty of people can still reach FI without ever tracking their expenses but I know first-hand that measuring how much you’re spending and what your spending it on has a lot of positive psychological effects.

Some of the positives of tracking are:

  • You regularly review where your precious dollars are being allocated to each month. Think back to lesson 1. ‘The ultimate goal is to be happy’. Is the stuff you’re buying ultimately making you happy?
  • You can accurately calculate your current FIRE number? Guessing how much you spend each year to maintain your current lifestyle can create stress and anxiety when the time comes to retire. You’ll second guess yourself. Even though things can and will change throughout your life, if you’ve been tracking your expenses for a few years you’ll have a much better idea of what size portfolio you’ll need to retire.
  • It’s super easy to trim the fat. Unused memberships and subscription services can sometimes fly under the radar. Reviewing expenses bring this wastage front and centre.

But be warned… overdoing this area can actually have negative consequences.

I used to be one of the worlds biggest tightasses (still pretty tight compared to most ‘normal’ people haha) but what I’ve found through the last decade of managing money is that the majority of people will find great success if they focus on the big four areas.

  1. Housing
  2. Transport
  3. Food/drinks (including alcohol)
  4. Holidays

Try to optimise these big areas and don’t kill yourself for paying for a haircut.

I’d say that the top one (housing) is probably the most important. Buying a huge house at a young age can stunt your wealth creation potential. Spending 50+% of your paycheck on rent has the same effect. You want to get your snowball up and running asap and let the compound interest do the heavy lifting over many years/decades.

If you optimise those big four areas to a point where you’re living a great life whilst having a decent savings rate it’s only a matter of time before you hit FIRE 🎉.

Ultimately, this lesson is super effective at improving your behaviours when it comes to money management.

 

6. Income potential is often overlooked

Over the last decade, I’ve met and spoken to a lot of people who have reached financial independence and there seems to be a common theme.

  1. They are good savers
  2. They have a higher than average income

The funny thing is that a lot of these people are actually below average investors. I heard all sorts of stories about how they might have lost money on a development, got swindled by a pyramid scheme or lost it all on a speculative stock. Yet they seem to reach FI decades earlier than most after eventually figuring out some form of investment that works for them.

The bulk of their wealth comes from a healthy savings rate powered by a high income.

For the first 7 or so years on my journey towards FI, I focussed solely on saving a whole lot of money and investing it in both real estate and stocks.

It wasn’t until I moved overseas in 2019 and more than doubled my hourly rate did I truly appreciate the power of earning more money.

I mean it’s pretty obvious, isn’t it?

The more you earn the more you can save and reach FI quicker. But for some reason, I always prioritised saving more and reading the same investing strategies over and over again making little tweaks here and there.

Having a high savings rate is really important. I reckon we managed to optimise our expenses after 1 or two years at most. After that, it’s pretty much been on autopilot. We have a pretty good idea about what brings us joy and where our dollars go.

I’ve spent way too long (especially at the start) obsessing over the ‘investing’ part of the FIRE equation. There are soooooooo many articles, videos, books, podcasts etc. that dive into all sorts of whizz-bang investing strategies that it can be confusing as hell.

It’s sorta like when you go to the Cheesecake Factory. Their menu is so bloody big and confusing that it can be overwhelming. I’ll try to read absolutely everything because I don’t want to order a meal and then have food envy because something better was further down the menu 😂. This is what’s known as analysis paralysis and a lot of people can fall prey to it (it personally took me years of reading about the stock market before taking the plunge).

It’s natural to feel like you need to know absolutely everything before dropping your money into the markets. But the truth is that we all make mistakes and the most basic concept of investing is buying things (real estate, stocks, precious metals, bonds etc.) that make you money. Don’t stress too much about building the perfect portfolio because I’m telling you it doesn’t exist.

Index investing appeals to so many people because it’s passive, diversified, low cost and provides a great return with little effort. Don’t overthink it. Work out a portfolio that you have strong conviction in and one that will allow you to sleep at night. Save your money and keep adding to the portfolio regularly.

If you still have time and energy to commit to FIRE after your expenses are under control and you’re happy with your investing strategy, I’d seriously start to look to increase your income.

High savings + high income + below-average investments

is better than

High savings + below-average income + above-average investments

Obviously, it does depend on how epic your investment returns are but generally the above is true from what I’ve personally experienced and seen over the last decade.

There are heaps of ways you can increase your income. I wrote about a few of them in this article here.

 

7. Compound interest takes years to notice

I learnt about the power of compound interest pretty early. There’s that famous story about two colleagues that’s told 100 different ways but it always illustrates the same point. Investing early and taking advantage of compound interest pays off in the long run.

This little graphic is one example.

Image Source: Mark Catanzaro

 

I’d like to think most people in the FIRE community have come across this (or something similar) before.

But most people (myself included) have a hard time truly appreciating the magnitude of compound interest and it doesn’t start to feel real until you’re near the end of your journey. There’s something about exponential growth that makes it difficult to grasp from an emotional point of view even when we understand the math. I think it has to do with most other things in life being linear. We do basic arithmetic almost every day in our lives but I don’t know anyone who can compute exponential growth without a calculator.

If we need half a dozen eggs for a recipe and know we already have 2 at home, that’s a simple subtraction problem that’s easy to think about on the fly and makes sense. If we choose to buy a car worth $10K instead of $15K. That’s an obvious savings of $5K which makes it easy to immediately appreciate on the spot.

But it’s hard sometimes to come to grips with putting away large sums of money now so the future you in 10-30 years can live a better life.

Here’s one of my favourite examples of exponential growth that you can play with your friends.

The story of the monthly coins. 

If I gave you $1 each day in the month of January, how much money would you have at the end of the month?

Most people would be quick to shout $31 right.

But suppose I gave you $1 on the first day of January and double it every day until the end of the month ($2 on the second day, $4 on the third and so on), without cheating, try to have a guess in your head how much money you would have at the end of the month.

Take a few seconds to think about it and keep a mental note.

….

….

….

The answer is $2.1 billion dollars. That’s a billion… with a B 😱

Try this example with your friends to see what number they guess. 99% of the time they won’t get anywhere near the correct answer.

I use the example to illustrate the point that compound interest is not intuitive to grasp and it really only starts to take off in the later years. Speaking from experience, I really noticed compound interest once we had around $400K+ invested and our FIRE number is $1.25M for context.

Before that, it feels like you’re doing all the heavy lifting yourself through savings (which is pretty much what’s happening).

But boy oh boy it’s an amazing feeling when the freight train starts to pick up steam and suddenly your investments are making more money than you can save each month. After that, there’s no stopping it and you’ll feel like you’re almost cheating as you race towards the finish line.

 

8. Most people are really after semi-retirement

Every single financially independent person I’ve ever met, read about or listened to still ‘works’ and makes money outside their investments one way or another.

I’ve added talking marks to the letter ‘work’ because it’s not really traditional work but people can get really anal when it comes to the word retire. I’ve always interpreted RE (retire early) part of FIRE as the moment you quit your cubicle/wage slave job and pursue meaningful work that brings you purpose.

But this can be confusing because not everyone has something they’re super passionate about. There’s a large portion of the community that really likes the social aspect and comradery of their normal day job but just want a little bit more free time in the week to get stuff done and enjoy life.

Based on the emails I’ve been receiving for the last 7 or so years I’ve come to the following conclusion. Most people in the FIRE community are really just looking to work 2-3 days a week and maintain their current lifestyle with some passive income to cover the rest/set them up for retirement in their golden years.

And as someone who is currently only working 3 days a week, I must say that I’m becoming more convinced that semi-retirement is the sweet spot for the bulk of the community too.

Full financial independence is great and it’s what we should be aiming for later on in life, but building up a portfolio that kicks off enough passive income to free up one or two days a week can have astonishing results.

And the best part about compound interest is that the momentum you build up early on in the journey only gets stronger and can carry you all the way to full fledge FI without you needing to add to your portfolio after a certain point.

This concept is known as Coast FI or Flamingo FI and the end result is the same. Full financial independence.

But if you drop down to semi-retirement during your journey you’ll obviously not have as much money to contribute to your portfolio and won’t reach FI as fast.

Traditional FIRE. Source:moneyflamingo.com

Coast FI. Source:moneyflamingo.com

If you want to know more about coast FIRE I’d highly recommend you check out this article at the money flamingo blog (Aussie specific too!).

The odds of someone never working and making any sort of income outside of their portfolio ever again after reaching FIRE is incredibly low. I’ve been saying this for a few years now but the 4% rule is over-conservative in my book. Putting aside the fact that the author of the 4% rule has increased it to 5%, any additional income after you’ve reached FI completely blows out the modelling.

Let me give an example.

Our FIRE number is $1.25M which will generate $50K per year based on the 4% rule.

Let’s assume that we get to the $1.25M, declare FIRE but decide to both work 1 day a week for 8 hours at $30 an hour.

Would you believe that our combined take-home income would be ~$25K a year? That’s half of what we need to bloody live on!

The portfolio could easily cover the rest and here’s the amazing part. Because we wouldn’t need to be drawing down 4% of the portfolio, it could compound away for longer at the higher amount.

Here’s what half of the portfolio ($625K), if left alone, could potentially grow to given an 8% return after 10 years.

~$1.35M is more than our original FIRE number!

And it’s really important to realise that we only worked one 8 hour day at $30 an hour in this example. You could imagine how dramatic the modelling changes if you worked an extra day or charged a higher hourly rate.

There are two main points here.

  1. You’re almost certainly going to be earning money post FIRE
  2. The 4% assume no extra income ever. This is extremely unlikely if you reach FIRE in your 20’s, 30’s, 40’s or even maybe 50’s.

 

9. Find your ‘enough’

Joseph Heller, an important and funny writer
now dead,
and I were at a party given by a billionaire
on Shelter Island.
I said, “Joe, how does it make you feel
to know that our host only yesterday
may have made more money
than your novel ‘Catch-22’
has earned in its entire history?”
And Joe said, “I’ve got something he can never have.”
And I said, “What on earth could that be, Joe?”
And Joe said, “The knowledge that I’ve got enough.”

— A poem for The New Yorker in May of 2005 by Kurt Vonnegut

I honestly think there’s something in our DNA as humans to always want more.

It has to be some sort of evolutionary trait right.

Imagine two homo sapiens coming across an enormous fruit tree bearing 50 ripe Apples.

The first human decides to only eat enough to be full and then leaves.

The second human gorges themselves and then picks and carries as many as they can hold back to camp with no consideration of others.

Which personality traits do you think has the better chance of surviving and passing on their genes to the next generation? As unfortunate as it is, selfishness is rewarded in the animal kingdom. I know it’s hard to imagine with all our fancy pants technology and civilisation, but we’re not actually that far removed from our prehistoric ancestors and evolution hasn’t yet caught up to deal with the current situation we find ourselves in.

Most of us are hard-wired to always want more. 

But you’ll never become FI if your desires and wants continue to increase forever.

Think back to lesson one “The goal is to be happy”.

If you desire something and you don’t have it, this usually results in a feeling of unhappiness. And there are only two ways to fix it.

  1. You work hard and get what you want.
  2. You find happiness elsewhere and stop wanting it.

Depending on how exorbitant your wants and desires are, option 1 could mean many decades climbing the corporate ladder working 70+ hours weeks to fund your:

  • 3,000sq m Toorak mansion
  • 6 beds, 5 bathroom holiday house in Byron Bay
  • 5 cars
  • 3 jet ski’s
  • And so on

Now I don’t want to be judgemental here. If you really want all those things and think the work required is worth it. Sweet. Go for it. Everyone is different.

But if you’re reading this article, odds are that you’re more attracted to the idea of living a simple yet great life that prioritises freedom, autonomy, health, relationships and ultimately happiness.

Figuring out what your ‘enough’ is takes a long time. This is partly because our wants and desires evolve as we get older and our circumstances change.

I for example, never really put too much value in travelling before 2019. I’d been on a few trips here and there and whilst it was good fun, I used to think that international travel was insanely expensive and overrated. Travelling around the world and living in the UK for 2 years completely changed my outlook on a lot of things and broadened my horizons. I now consider travelling to be part of our lifestyle and something we will need to factor into our numbers.

And even though I think a little bit of lifestyle inflation is perfectly normal and healthy, you’ll never have peace of mind until you discover your ‘enough’.

If you don’t figure it out, you’ll always be wanting more.

 

10. We’re all dealt a different hand in the game of life

There’s a quote that I can’t seem to find that loosely goes like this.

A CEO was perfectly happy with their $1M bonus until they found out a competitor CEO received $100 more

Comparisons. We’re all guilty of making them.

And the messed up part is sometimes we were happy until we see what someone else has.

It happens all the time and is part of the reason I’ve disconnected all of my social media accounts.

Practising the art of gratitude can be really helpful to remind yourself of all the great things in your life. But we’re humans and I’ve fallen victim to unrealistic comparisons a bunch of times. It’s perfectly natural to stumble across someone who you may have gone to school with and be jealous of the life they’re living now.

What I’ve come to realise after hearing from literally thousands of Aussies on their way to FI is that there can be a gigantic gap between peers within the same cohort. I’m talking about the advantages and disadvantages between two people who on surface value seem to be pretty equal.

There’s a great book called Outliers by Malcolm Gladwell that explains just how incredible one little advantage early on in someone’s life can completely change their trajectory.

Did you know that 40% of the best hockey players in Canada are born between January and March?

This is no coincidence. It turns out that in minor league hockey, children are grouped by birth year and players born in January are, on average, bigger and taller than December-born players.

This seemingly unimportant attribute gives players born in the first months of the year a head start that turns into a lifelong advantage.

That one little leg up can have the following flow-on effects:

  • They are bigger and stronger than their peers which makes hockey easy for them
  • They are noticed by coaches and identified as a good player. Extra coaching or special treatment may be given
  • They will most likely be chosen to represent their squad team which means more playing time against a higher level of competition and access to better coaching
  • They continue to get extra playing time against elite competition with the best coaches in the country year after year

These sorts of advantages happen all the time and compound throughout one’s life.

The same is equally true for disadvantages.

But it’s really hard to know what cards a person has been dealt even if you know them quite well. And it’s almost impossible when reading a stranger’s blog or listening to a guest on a podcast.

The goal of FI is a mastery of money that’s a personal journey.

A little bit of healthy competition can be good but never feel inadequate when you come across someone similar who seems to have it all figured out. They may have been dealt two aces.

The reverse is also true.

We have no idea what has happened in someone’s life that has influenced the position they’re in now.

In summary, compete against the person in the mirror.

Wake up each day trying to be a better version of yourself.

Because…

“Comparison Is the Thief of Joy”

— Theodore Roosevelt


 

That’s a wrap! 10 the biggest lessons I’ve learned over the past 10 years pursuing FI!

I’d love to know what was your favourite lessons in the comment section below 🙂

As always,

Spark that 🔥

The Importance Of Increasing Your Income

The Importance Of Increasing Your Income

The below article is actually a chapter I wrote for a great collaboration ebook put together by Pearler. I would highly recommend checking out the entire eBook (for free of course) which you can grab here.


“A dollar saved is better than a dollar earned”

We’ve all heard that one before. The ability to save more than you earn is a fundamental principle upon which FIRE is built.

Hands-down the most important step for reaching FIRE is how much of your paycheck you can keep and invest.

You cannot earn/invest your way out of bad money habits. It will eventually catch up with you no matter how much money you make. If you’re spending more than you earn, you’re going to be broke. It’s just simple mathematics!

It’s sorta the equivalent of trying to outwork a bad diet and expect results in the gym. In fact, there are so many parallels between good financial habits and being fit and healthy it’s uncanny. Most health/fitness experts would agree that your diet probably plays the biggest role in keeping your body happy. The other two major players would most likely be exercise and sleep. If you’re nailing all three of those, there’s a pretty good chance your body is feeling awesome.

Savings is to FIRE, what eating the right foods is to living a healthy lifestyle.

And if we follow this little analogy a bit further we might conclude that…earning money in FIRE is equivalent to or around the same level of importance as exercise when it comes to health and fitness. And maybe we can put getting a good nights rest at the level of investing.

It’s not a perfect one for one comparison but it makes for a good metaphor so let’s keep rolling with it.

I’d wager that 90% of FIRE content is either about saving money or investing. But we seldom read how to earn more money even though it has astronomical benefits when implemented correctly. It’s true that FIRE is income agnostic, two people with a savings rate of 65% will both reach FIRE in around 10 years even if one earns $60K and the other $400K.

But there comes a point of diminishing returns for both saving money and investing.

The purpose of this article is to explain how beneficial it is to spend more time and energy increasing the amount of $$$ that flow into your accounts. Anyone who is on this path is already doing some form of exercise (earning money) but if you can look past your standard crunches and pushups you’ll discover there are gymnasiums out there filled with weird and wonderful machines that provide all types of workouts. And when you combine a great diet with a dialled in training routine that works best for you, the gainz can be off the charts.

BFYB Factor

The aim here is to illustrate just how much of an impact increasing your income (even a tiny bit!) can have on your journey towards FIRE.

Let’s try and apply the same metric to the three most important focus areas IMHO when it comes to reaching FIRE.

  • Save more than you earn
  • Increase how much you earn
  • Invest your savings

We’ll call the metric BFYB (bang for your buck).
BFYB = The amount of effort required to improve a focus area

Let’s look at our first focus area (save more than you earn) and re-establish why it has the best BFYB value.
Increasing Your Savings Rate

Using The Australian Financial Independence Calculator we can plug in Joe Smith’s journey towards FIRE starting from $0.

We’re assuming he is a single 30-year-old Sparky from Brisbane who owns his 3 bedroom home (no mortgage), works 38-40 hours a week, doesn’t have kids and all the below numbers stay constant over the next 30 years to make the modelling super simple.

Ok, so an Australian who earns $80K with a savings rate of 30% can retire in 21.2 years. Not too shabby.

A 30% savings rate is already way above the average but let’s just assume Joe, whilst obviously a diligent saver already, is living a pretty normal consumerist 21st-century lifestyle with a heap more fat to cut. I don’t think it’s unrealistic or even that hard for him to go from a 30% savings rate to 40% given his circumstances above. The difference between 30%-40% is $5,538 a year or $106 week. I would almost guarantee that 90% of Australians spend more than $106 dollars a week on things they don’t need or even want half the time (myself included). Optimising big-ticket items like housing, transport and food would almost certainly save a whole lot more than the $106 a week we require for this example.

Anyway, if we bump the savings rate up to 40% we wipe off 4.5 years!


BFYB: Great

Everyone’s circumstances will vary but the effort required in my guesstimation for Joe to increase his savings rate 30% to 40% is rather small and the BFYB is high.

This is what we want. Low effort, high reward.

And it’s why focusing on your savings rate is absolutely the best way to decrease the amount of time towards FIRE… up to a certain point.

There comes a point of diminishing returns where focusing on your savings rate will not yield a good BFYB and the hard part is that it’s different for everyone because of circumstances. I can only speak for ourselves but this is what our savings rate BFYB chart looks like:

Currently, we can pretty much save close to 40% of our after-tax income without breaking a sweat. That means no sacrifice or comprising on anything. The effort for us to save 40% is almost the exact same as saving 10%. But the effort required to maintain a savings rate of >60% is when things start to change. For us to optimise our lifestyle further and squeeze out a few more percentages is astronomically harder to do when we start to get around the 65%-75%+ range. Don’t get me wrong, we could do it. And that would speed up our journey to FIRE… but at what cost?

If I can draw from our earlier metaphor of our savings rate being similar to a diet, we could say that cutting out junk food during Monday-Friday and making sure you eat some sort of leafy greens every day is a realistic goal with huge health benefits. But if we tried to never drink alcohol or eat Macca’s ever again, firstly we might be setting ourselves up for failure and secondly, whilst being the healthy option, it’s not going to have as big of a health benefit as the first goal. There are diminishing returns for eating healthy just like there are diminishing returns for improving your savings rate.

Increasing Your Income

This is the focus area that doesn’t get enough attention.

Increasing your income has a direct correlation with your savings rate but for whatever reason, a lot of people never put in the time and effort to improve it. There’s so much low hanging fruit which doesn’t really require a whole lot of effort but has a high BFYB value.

Let’s look back at Joe Smith from above but change one thing. Instead of him saving $5,538 a year, let’s have him earn an extra $5,538 (after tax) a year and see what happens.

Joe increased his after-tax income by $5,538 which in turn wiped off 2.7 years!
BFYB: Really good

We’re going to be talking about the low hanging fruit later on but if I’m being honest, Joe could easily make an extra $5,538 (after tax) purely from giving up more of his time. If we assume he’s making an after-tax hourly rate of $28, he would only need to put in an extra 197 hours worth of work over the year. And that’s not even factoring in overtime or weekend rates. An extra hour for 197 working days a year is really not that much.

Some of the stories I’ve heard first hand from young London bankers is absolutely mind-boggling. Think 70-80 hours per week… and work on weekends is to be expected!

2.7 years is not as good as our savings example above which wiped out 4.5. But if we combined them, we get epic results!

Improving our savings rate and increasing our income by the very same amount has annihilated 6.53 years of working.

Now we’re cooking with gas!

But just like our savings rate, there are diminishing returns in the pursuit of increasing your income. And I keep coming back to circumstances but unfortunately, it’s very much a circumstantial question when we start talking about this focus area because we all aren’t on an even playing field.

Below is my personal increasing income BFYB chart:

Let me explain what this means because it’s important.

Let’s say I’m unemployed next year (which is what’s most likely going to happen when we move back to Australia) and my salary is $0 (ignoring any investment income of course). I’m scanning through the classifieds looking for my next job, which, for this example will be the sole source of my income.

For my circumstances personally, it doesn’t require any extra effort for me to land a job paying $100K as opposed to around $35K annually. I don’t want to sound overconfident but I have a certain set of skills and experience that the market is willing to pay me and I’m 99% sure I could land a job paying close to $100K no worries. In fact, I’d probably have a harder time getting my old job back at Coles if anything. Beyond $100K is when the effort required starts to increase and the BFYB value starts to go down.

Remember, BFYB = The amount of effort required to improve a focus area.

The effort required to earn a salary past $100K starts to increase a lot and for me personally, the extra effort doesn’t justify the extra income at around the $130K-$150K mark. Beyond that, there’s too much sacrifice with not enough gain. Too many responsibilities and work-related stress that I don’t feel is justified for the extra $$$. You may have certain skills and experience where earning $150K is actually quite easy and no different (in terms of effort) than earning $100K.

If we look at the ABS data from 2018 the median income for a full-time employee in Australia is $76K a year. If we adjust for two years of inflation we can round it off to 80K and we now have a benchmark.

$80K a year is the standard form of exercise for full-time Aussies. One light jog and occasional push-ups weekly would probably put you in the average to above-average category of exercise in Australia as sad as that is.

If you’re earning under $80K a year and have already optimised your expenses, you may be in the position to grab some really low hanging fruit and increase your income for an excellent BFYB return.

Adding in some resistance training 2 hours a week is such a small amount of effort that has an incredible return. Not only will you become healthier and stronger, you’ll potentially save yourself a lifetime of injury and illness that’s so common in our sit down all day 21st-century culture. Cardiovascular and resistance training has shown to help with sciatica, pelvic tilt, back pain, heart disease, diabetes etc. I have always considered myself a pretty active person but even I had hip issues 3 years after starting full-time work which I 100% attribute to sitting down all day and not stretching my hip flexors or strengthening my glutes. This hip issues crept into a lower back pain issue and before I knew it, I was going to the physio a few times a month. It didn’t take longer than a few weeks of specific stretching and strengthening exercise to completely resolve all of my issues and I continue parts of that program to this day nearly 10 years later.

You don’t need to jump into a 5X5 strength split or start yelling “Yeah buddy…Ain’t nuttin’ but a peanut!” after every rep in the gym. Three focused 45-minute sessions a week offers great health benefits just like spending a bit more time increasing your income can wipe years off your FIRE journey!

Improving Your Investment Returns

And now we’ve come to the most talked about, most analysed… most overrated focus area.

Investing!

I want to bring up two quotes to set the tone for this focus area.

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – George Soros
“There seems to be some perverse human characteristic that likes to make easy things difficult.” – Warren Buffett

I am so guilty of the second quote. When I first discovered financial independence I was convinced that there’s some sort of magic formula that these rich guys must be using to get ahead. It’s part of the reason I started investing in a trust. It was like this complicated black box with all these advantages that only the rich guys understood and used. I wanted in on the secret and did my research hoping to stumble upon the golden goose. While there are some benefits of investing within a trust, I must admit that I was lured to its complexities and perceived mysteries (for whatever reason). It took me years to fully appreciate the power of simplicity and if I could start again, I would have never bothered with the trust.

I feel so many FIRE n00bs fall into the same trap. They go looking for a magical formula that simply does not exist. And even if it does, it’s almost certainly locked away in a secure blockchain quant investment hedge fund somewhere.

Here’s the deal, you can absolutely optimise your investment results up until a certain degree with barely any more effort involved. I’m going to ignore inflation, risk appetite and investment horizons for a second to make the point.

Investment returns have historically fallen around these marks:

0% – Storing your money in a shoebox under your bed
2% – HISA
3.5% – Bonds
7% – Real estate
8% – Shares

You can argue back and forth about how those numbers were gathered and what methodologies were used but it doesn’t really matter.

Realistically, any Aussie out there can achieve those returns rates in those asset classes without an economics degree. Index investing opened Pandora’s box and enabled the average Joe to grab a piece of the market without needing to spend the time researching and analysing financial statements.

Diversification and low management fees provide the best BFYB when it comes to this focus area. Everything else has such minute benefits that it’s laughable so many people spend so much time and effort trying to see which ones better.

To demonstrate this here is our BFYB chart for investment returns

So basically we can get up to around 8% without much effort required. It’s always good to put the time and effort into understanding the asset class but theoretically, any Joe Blow could dump their money into a diversified index fund like VDHG and get ~8% over the long term.

I don’t know any assets class where you can get a better return without extra effort. There’s plenty of ways to improve your return on investment. I sold my first investment property and calculated an after-tax annualised return of 36% but the number of extra hours I put into that investment was the equivalent to another part-time job.

Newbies to FIRE and investing don’t really understand just how hard it truly is to beat the market consistently over a long period of time (20+ years). There are people who can do it, I’m not saying it isn’t possible. But the amount of effort and skill that is required to actually discover alpha year after year is something only a very few incredibly skilled people have managed to achieve.

We’ve all heard the famous story of Warren Buffett betting a $1M bucks against 5 hedge funds that a simple index-tracking ETF would outperform them over an eight-year period. Not only did he win that bet, but it wasn’t even close.

But let’s just entertain the idea that you’re an outlier. You possess incredible skills and techniques far beyond most active traders and hedge fund managers all around the world and you’re able to consistently beat the market.

How much better off would you be if you were able to outpace the market by a whopping 100 basis point (1%). 1% doesn’t sound impressive but if someone can beat the market by 1% over a long period of time then you’re most likely going to make more money in a hedge fund picking stock than you are at your day job. Your skills are extremely valuable.

We’re going to pretend that you keep this incredible skill to yourself and only use your god-given talents for your personal share portfolio. How much of a difference would 1% actually make?

Let’s find out.

Even using our top tier investing prowess we only managed to wipe off 2.3 years which was actually the worst result compared to saving $5,538 (4.5 years) or earning an additional $5,538 (2.7 years).
BFYB: Bad

Think about how much time and effort some funds put into research for investing. It’s a full-time job with an army of analysts and advisors all crunching numbers, creating models and using the latest predictive methods in the odd chance that they can justify their hefty management fees. And most of these funds don’t even beat the index when fees are accounted for.

What hope in hell do the rest of us have?

The example above used a huge 1% difference over nearly 20 years.

How many times have you seen someone ask about A200 vs VAS on the internet? It’s gotta be one of the most discussed and analysed topics within FIRE communities. The difference in management fees between these two funds is 0.03%…

Let me say that again. 0.03%

They do track different indexes (ASX200 vs ASX300) and do you know what the difference has been between those two indexes over the last 10 years… 0.04%

So maybe… just maybe those two funds might return a difference of +-0.1% over the long term.

10 basis points of difference is your reward for correctly picking the better performing ETF over that time period.. and that’s assuming you’re even able to use skill to pick the one that’s going to perform better (which you almost certainly won’t be able to do).
BFYB: Horrendous

A200 or VAS?
A200+VGS or VAS+VTS+VEU?
IVV or VTS?
AFI or VAS?
LICs or ETFs?
VDHG or create my own?

Most of these arguments don’t make a huge difference. It’s really important to understand the key concepts around management fees, diversification and why index investing works. But just understand that if you’ve got one of the above combo’s, you’re already more diversified and paying lower fees than most Australian investors to begin with.

The basic investing principles for Australian FIRE is to build a low cost, diversified share portfolio mainly made up by ETFs/LICS. You want to buy consistently no matter what the market is doing and grow your snowball to a point where it’s passive income can fund your lifestyle.

There’s going to be a 100 different flavours of that ice cream but once you have those basics down pat, the bulk of the work is done. You can always tweak and improve your portfolio to suit your circumstances but honestly, if you’re trying to reach FIRE faster and think that crunching numbers in Excel for 10 hours a week is going save you years of working, you might be in for a rude shock!

Keep your investing simple and boring. Use your precious time optimising your expenses and working on ways to increase the amount of money that flows into your account because IMHO, focusing time and energy on savings and increasing your income has the best BFYB returns.

Different Ways to Increase your Income

I hope after reading the above you can now appreciate just how underrated increasing your income is. The saving rate is held in high regard within the FIRE community thankfully, so there’s not much to add there.

But my goodness does investing get way too much of the limelight. It’s largely out of your control too. Other than choosing your diversification levels and sticking to a low-cost fund, you’re very limited to how much you can improve the results.

When it comes to increasing your income though, the complete opposite is true. The harder you grind the more money you will make! And the more money you make, the higher your savings rate will be (if lifestyle inflation doesn’t get ya)

So let’s jump in to see how we can improve our crunches and pushups and maybe head over to the dark corner of the gym, away from the treadmills and cross-fitters… the weight room!

Ask For A Raise

We’re going to start by improving our current workout (salary job).

One of the easiest and most low hanging fruits on anyone’s list should be to simply have a conversation with their boss about their salary and ask for a raise if they think they deserve more money.

How many times have you heard about someone complaining for years that they’re underpaid but never actually taking the action of setting up the meeting to discuss their pay? I’m not saying this will have a 100% success rate but more often than not, it will start the process of you either getting more benefits or creating the plan for your next raise or bonus.

You probably want to approach the meeting with some sort of reasoning like citing average incomes within your industry or comparing the work you do with someone else that’s being paid more.
BFYB: Great

Hardly any effort with the potential to add thousands extra to your accounts for years to come! No real risk either and it’s not like you have to learn something new.

Change Jobs Regularly

Asking for a raise or putting your head down and bum up climbing the corporate ladder is a noble way to jump the food chain and reap the rewards. But the sad truth in my experience is that loyalty to a company (or business for that matter) is rarely rewarded.

Your utility provider doesn’t offer a better deal when you’ve been a loyal customer for 10 years. It’s only when you leave do they all of a sudden roll the red carpet out.

If your goal is to make the most money in your field, changing jobs every 2-3 years is the best way to do it.

Be bold, be confident. Apply for positions beyond your capabilities. Back yourself to get the job done after you land it.

Fortune favours the bold!

I’m not saying to lie your way to a position only to fall flat on your face. Just understand that an ungodly amount of people are in jobs they were never qualified for or completely lacked the experience necessary to perform it at the start.

When I worked for the government back in Australia, we would engage with consultants all the time from various companies who always charged an obscene day rate to perform projects. Think $1,000+ a day. I worked directly with a lot of these consultants on the technical side and it always struck me as odd when they clearly didn’t know a whole lot. Here we were, getting charged $1,000 a day and I would end up doing 30% of the work.

Fast forward 5 years and I became a consultant myself after picking up contract work in London. My second contract was at one of the big four global consulting firms who are widely regarded as having some of the best professional services networks in the world. And boy do they charge accordingly for that reputation.

I worked on client-side with a team of consultants but was the only contractor. Two of the team members were really junior. One was 18 months out of uni and whilst really smart and willing to learn, didn’t know a whole lot about the technologies we were implementing.

My day rate for that contract was a whopping £500. It was more than double my daily earnings from back home and I couldn’t believe that a company would be willing to pay me so much.

Well, you might have guessed that I was completely blown away when I found out that the consulting company who I was subcontracting for, was actually charging me out at their SC (senior consultant) rate which is a staggering £1,250 a day 🤯. Even at £500 a day, I was only getting 40% of the pie!

And now it made sense why all the firm’s partners were driving McLaren’s…

But here’s the point of the story… everyone on the team was also being charged out at £1,250 a day!

I mean… honestly. One of them barely knew anything. And it was at this point that I realised that companies will lie and exaggerate the skills and experience of their products/services in order to get the most amount of money they think they can get away with.

You should be doing the same!

Last point on this one, be prepared to move somewhere where your skills are in demand. This might mean international.
BFYB: Great

Side Hustles

Time to get out of your comfort zone!

The two tips above were focussed on improving your current situation. Everyone’s working out to some degree so it would make sense that we start by improving your running technique or buying training gear. But now I want to take you into that dark corner of the gym where you might not have been before. It’s not going to be easy and learning new things can be difficult. But I promise you that the benefits here are worth the effort.

I’d rather not bore you by listing every single side hustle I can think of either. I have personal experience in a few side hustles which I’d like to talk about but there’s really an unlimited amount of ways to bring in a little extra cashola.

Work a second job:

This one depends on how exhausted you are working your main job, but there’s plenty of people who work two jobs and cope just fine. Mrs FB used to do a bit of bar work on Thursday and Friday nights even though she didn’t need to. She worked with her sister and a few friends and half the time most of her friends were drinking at the bar (a small country town so not many other options lol) so she was sort of where she’d be anyway just earning money instead of spending it. A little bit of extra work equated to thousands of extra dollars in her account without too much effort involved.

The second gig can be anything too. Teaching piano, tutoring, Uber driver etc.
BFYB: Ok

Sell stuff:

One of my biggest pet peeves is throwaway culture. The amount of effort that went into digging something out of the ground, refining it, transporting it, manufacturing it, shipping it, storing it and to have someone finally buy/consume it… only for it to be thrown away in the trash not long after.

Utter insanity!

Never throw away something just because you don’t want it anymore. If it was once a good product, odds are you can sell it online to someone and recoup some of your losses. Hell, I even managed to sell my old pair of Nike’s for $30 once. Legit took me less than 10 minutes to list it. How many of you out there would be willing to work for $180 an hour?

At worst go down to your local Salvos and donate it. Chucking something that is perfectly fine in the trash is sooooo lazy, a bad financial habit and adds to humanities ballooning trash pile that mostly ends up in our oceans.
BFYB: Ok

Credit Card Hacking:

I’ve been credit card hacking for nearly a decade. In a nutshell, you sign up to new cards to take advantage of the signup bonus these CC companies offer and then spend the points on products, flights or convert them to cash. You can also pay for everything on the CC and accumulate points over the course of the year. A little bit of effort for a pretty decent bump IMO. The only risk is that you need to ensure you pay off the CC amount in full at the end of each month.

Oh, and some cards come with free travel insurance which can cost hundreds of dollars.
BFYB: Ok

Matched Betting:

Something I only discovered in 2019 after ignoring it for nearly 6 months because I thought it was a scam. The principles are very similar to CC hacking. The bookies offer you signup bonuses where you join with the caveat that you need to gamble the bet in order to access it. Matched betting is the mathematical approach for discovering arbitrage opportunities between back and lay bets. Or simply put, playing the bookies against each other to make money. When you do it correctly it’s mathematically impossible to lose but it’s a lot more complicated than CC hacking.

There’s a lot of low hanging fruit here for those who who want to put the time and effort into learning it. The two advantages that matched betting has over CC hacking is that firstly the amount of money you can make is a lot more. The low hanging fruit can be anywhere between $1K-$2K. And secondly, matched betting can be done for an extended period of time and not be just a one-off. I’ve had many people email me about the money they have made from matched betting exceeding $15K.

The signup bonuses are the low hanging fruit because after that it basically turns into another job. The fact that you can do it over the internet is a huge plus in my book.

Full warning with this side hustle though, you must do your research because if you make mistakes you can lose a lot of money. I’d suggest listening to the matched betting podcast I recording in 2019 and reading about the feedback I received from readers later that year. Some people had good experiences, some had bad.
BFYB: Ok

Start An Online Business

I’ve become an enormous advocate for having a crack at online business.

There are just so many advantages that being 100% online offers to the traditional way of doing things.

Some of my favourites are:

  • Can run the business/company from anywhere in the world as long as you have an internet connection
  • Startup speed. You can literally create a website/blog/YouTube Channel and begin creating content/a product and have the world at your fingertips within hours. This is simply mindboggling and it gives any entrepreneur a realistic chance to create something that will be successful.
  • Incredibly small start-up costs. Gone are the days where you’d have to risk financial ruin in order to start a business. How many people over the last 100 years have had a killer idea but lacked the capital to get it off the ground? I think Aussie Firebug cost me <$100 the first year.
  • Can scale as your business grows. This is what I love about cloud services in general. You only pay for how big you are and you can scale in a matter of seconds to accommodate a larger audience if/when you get there.

Aussie Firebug will always be a passion project but around late 2018 I officially started to monetise my content and miraculously it managed to make over $30K last year and I’m on track to make it again this FY.

I could do an entire article about how to monetise a blog/podcast because making money digitally is such a new concept (relatively) and there’s a lot to get your head around. Even though I’ve already listed a whole bunch of benefits above, probably the biggest advantage that an online business can offer someone on the road to FIRE is its ability to make semi-passive income.

A website/podcast/YouTube Channel is constantly available to everyone in the world. It’s not like a shop where you need to physically be there to make things run. And if your product is digital (you’re not selling something physical) you don’t need to store it and it can be replicated without any cost. If you sell a physical book you will need to pay to get that book printed and shipped. If you sell an ebook, you can literally just copy and paste a new version and send it to people straight away. The power of the internet!

Plus there’s a whole bunch of automation you can set up in the background where a lot of the day to day business operations can run on autopilot.

I think back to how many hours I put into Aussie Firebug during the first three years. The amount of time was crazy, probably averaged 1.5 hours each weeknight for 3 straight years. But the beauty of something like a blog/podcast is that most people are making the content because they really enjoy it. I didn’t earn anything for the first three years but I built the content that would later be the main drivers to allow the site to be monetised.

I’ve made over $60K during the last 2 years and I’d say on average I’m lucky to spend ~5 hours a month these days. My life has become completely different since moving overseas and travelling around and I just can’t dedicate as much to Aussie Firebug as I would like to.

But the point is that I’ve set up certain automations that enable the site to make me money while I sleep. I can’t tell you how satisfying it feels to wake up most mornings and see people taking advantage of companies that I use and recommend.

This concept is immensely powerful no matter what the online business is. Work can be recycled and can continue to make you money even while you sleep. I know a YouTuber that basically earns most of his money from a few videos he recorded years ago. Yes, he still continues to make new videos to keep the channel up to date, but the bulk of his income is still being generated from 2 or 3 pieces of digital content he created a long time ago.

That’s something you simply cannot do when you trade your time for money.

If you’re thinking about creating content I’d probably say that YouTube is the easiest way to start earning serious cash, followed by starting a podcast and unfortunately, dead last would be blogging.

The Double Whammy Effect

Side hustles and online businesses are a great way to bump up your income but there’s also a massive opportunity to simultaneously work on something that’s often forgotten about.

What are you going to do once you reach financial independence?

You don’t need to be FI to start plugging away at your passion project or whatever it is you’ve always wanted to have a crack at.

Start that project this weekend!

Momentum is a powerful force. If you have a little side hustle or project you get to work on for fun in your spare time, more often than not, when you do decide you’ve had enough of sitting in a cubicle for 40 hours a week, the transition is so much easier because you’ve already built up something to further sink your teeth into.

My preference will always be an online business but it doesn’t have to be that. Make candles, sell scented oils from Etsy, create a monthly COD tournament in your area. Anything you’re interested in will do. And don’t worry about making money because 9/10 times if you start doing something you love it somehow finds a way to pay for itself eventually.

Wrapping It All Up

I wrote this article with the intention of highlighting one of the most underrated focus areas in our community. Everyone should know by now that your savings rate is king but rarely do I see such admiration for putting time and effort into earning more money in your day job or by hustling on the side.

Far too often people come to the FIRE community hoping to discover the secret sauce that enables us to retire 30 years earlier than most. The methods we use to invest are actually incredibly boring and simple.

If you’re anything like me, discovering the concept of FIRE can change your life. I was bursting with excitement and enthusiasm when I realised that financial independence was an achievable goal that nearly any Australian can achieve if they prioritise it highly enough.

Focus more of this energy into something that’s within your control. That’s saving money and earning more. The majority of investment returns are largely out of our control which is why the never-ending debate between which investment is the best is largely a waste of your time. I’m not saying you shouldn’t educate yourself about investing. Just know that the difference between choosing A200 or VAS will not be a difference-maker that could potentially wipe years off your journey.

On the contrary, starting a hobby of making and selling custom jewellery in your spare time does have the potential to eliminate multiple years and maybe even decades. But more importantly, side hustles/businesses can offer the more important benefit of shaping your future in retirement. No one wants to reach financial independence just to say they did it. We want the freedom that it grants. But using that freedom to create your ideal lifestyle doesn’t have to start once you reach that magical number, you can start meaningful work right now and it can help you along the journey!

If I can refer back to our metaphor from the intro one last time I’ll leave you with this…

Most of you guys already have a great diet. Some are dialled in so well that you are hitting your macro and micro-nutrients to the gram. But it’s time now to look at your workout routine and see if you can fit in a few more sessions every week to really take it to the next level!

Spark that 🔥

Australia FIRE Survey Results 2020

Australia FIRE Survey Results 2020

Welcome to the very first Aussie FIRE Survey results!

Firstly, I know that half you guys read this blog on your phone but if you can, please come back to this post on a desktop or something with a bigger screen because the visuals look so much better and the dashboard was designed to be viewed on a desktop.

I’m really keen to run this at the start of every year and release the results along with the dataset for the wider community. I was inspired by the extremely popular Stack Overflow Annual Developer Survey Results that they publish each year for developers. Essentially, you can read where people are from, what technology is used the most in the community, what coding languages are hated the most and a whole bunch of generally interesting tidbits.

I had this idea mulling in the back of my head for years and thought wouldn’t it be cool to run an Aussie FIRE Survey each year and share the results! One of the greatest strengths of this community is that we are willing to share and talk about what is normally considered taboo subjects. I’m probably on the extreme end of the scale of what people are willing to share but the beauty of the survey is that anyone can fill it in completely anonymously.

The results below are both extremely fascinating and interesting. What I also hope that this annual survey can achieve is to give a little bit more help to would-be Firebugs who are trying to start their journey but don’t have a measuring stick.

Think about it, if you read something online about person X saving $30K a year and investing in VTS without any context, you don’t really know if that’s a lot of money for them (they could be earning $250k per annum) and what their circumstances are that made them choose that ETF.

At the bottom of this page is the FIRE survey dashboard where you can slice and dice the data to suit your needs. The richer this dataset gets, the more specific you guys will be able to drill down to your situations and get a feel as to where the rest of the community is at. You might be a 28-year-old single lad from Melbourne that’s earning between $80K-$100K. It might be of great interest to know what others in your situation are doing/are at with their journey.

That’s the idea anyway. I sorta stuffed up the survey when I ran it in March because I forgot to include some key questions (like super 🙈) but I already have a heap of improvements I will make when I open up the survey again at the end of this year.

The survey had 654 submissions across 9 countries and the results are broken up into four sections:

  1. Firebug Profile
  2. Investing
  3. Miscellaneous
  4. FIRE Dashboard (interactive dashboard using the data from the survey)
  5. Methodology

Feel free to download the raw data from here (Open Database License (ODbL)).

Please tell me what questions you’d like to see in the future version of the survey and just general tips or recommendations for me 👍

Enjoy!

 

Firebug Profile


Geography

 


*This map may not rendering on mobile phone screens

There was no surprise that the majority (621) of submissions came from Australia. I was actually shocked that 8 other countries contributed. I’d love for this survey and the results to become more global in the future.

I was pleased to see my home state of Victoria coming though with the most submissions for the Aussies 🤘
 
 
Age Range

No surprises here. I knew from my Google analytics that the majority of my audience fell between 20-40 years of age.

 
 
Sex

I'm currently working on some content that's more female focussed because finance and investing seem to be heavily skewed towards a male audience.

 
 
Relationship Status

I was thinking about FIRE for singles just the other day. It's definitely possible but a lot harder to do. Take our situation living in London for example. We pay £900 a month in rent that gets us a bedroom with an ensuite. Everyone else in the house pays around £700 and they have to share the downstairs communal shower. All the big-ticket items like living, food and transport costs can be shared between a couple whereas you're paying for everything if you're single.

 
 
Kids

Considering the age range that filled out this survey this result doesn't surprise me too much.

Was a bit surprised to see so many maybes tbh.

 
 
Education

Close to 70% of the respondents are university-educated 🎓. No wonder so many smart people live in the comment section!

 
 
Employment Status

 
 
What industry do you work in?

This one is super interesting because there seems to be a lot of people in the tech industry that are drawn to the concept of FIRE (I fall into that stereotype 🙋‍♂️). But the data is showing a lot of diversity! I probably could have guessed the top two categories but the rest was very interesting to see.

 
 
Annual Household Income (after-tax)

Holy moly some of you guys are earning a mint! I'll have to add more upper tiers in income for the next survey since the highest submission was for $195K+ 🤑

 
 
Net worth (excluding your home equity)

So the way I interpret the above data is that there must be a lot of people either at the start of their journey building up a solid snowball of around $50K-$200K and also a lot close to the end in the $1M+ range.

 
 
Living Status


I would have guessed the renters were going to take out 🥇 place here actually.

 

Investing


Have you reached FIRE?

 
 
How many years have you been investing for?

 
 
Financial Planner?
 

 
 
Top 10 ASX listed products owned

 
 
DRP/DSSP
 


I was a little surprised at how many people use DSSP actually.

 
 
How do you own your investments

 

Miscellaneous


Top 10 banks respondents hold their mortgages with

 
 
Side Hustles
 

Please note that the below figures are the annual median income after tax and not the averages. There were a few massive submissions that would have blown out the average completely so median seemed to be more appropriate.


hmmmm I think I need to get into Amazon FBA 😂

FIRE Dashboard


Here is what I believe to be the very first interactive FIRE dashboard generated from user data... ever!

There's probably someone out there that's already made one but I've never seen it. I'm really happy how the dashboard turned out and it's only going to get better each year as I add enhancements and features. The more people fill out the survey the richer the dataset will become which will make the insights and analysis more accurate.

Most things in the dashboard are interactive. You have the filters at the top but you can also click on each visual and it will affect the others.

Here's a quick little video explaining how it works.

I'd highly recommend viewing the dashboard in it's fullscreen mode. If you're on your mobile, please come back to this bad boy on a desktop. Trust me... it's worth it 😁

Feel free to have play with the PowerBI file here. There were some assumptions made in the dashboard but if you're interested in how the data was put together, the PowerBI file has everything you need.

Methodology


This report is based on a survey of 654 Firebugs from 9 countries around the world.
 

    • The survey was fielded from the April 5 to May 1 2020.
    • Unfortunately there wasn't a timed component in the dataset which means I could not qualify responses. I plan to add a timer for the next survey to fix this.
    • Respondents were recruited primarily through channels owned/ran by aussiefirebug.com which included: Aussie FIRE Discussion Facebook group, Aussie Firebug Twitter Account and Aussie Firebug Blog
    • All income figures are based on AUD. There will be changes to this in future surveys as I'm aware international salaries should ideally be converted to a base currency
    • Net worth figures are in AUD
    • Some visuals do not always take into consideration all the answers due to visual issues. There were 87 distinct values for banks for example. Reducing that to a top 10 is more visually appealing. You can always download the entire dataset if you want to know all the submissions.
Election Results & Strategy… 2.5?

Election Results & Strategy… 2.5?

In case ya missed it, earlier this year I published what turned out to be my most controversial article of all time (and it’s not even close). The Curious Case of Franking Credits and the FIRE Community of course.

The thing is, I actually really don’t like talking about politicians and what they say and plan to do at all. That piece was never meant to be political but after reflecting for some time now, it was always going to be that way due to the nature of the subject matter.

So why the hell would I ever go near it again?

Because even though I don’t like those 🤡, politicians do affect us in the journey to FIRE and I need to set the scene first in order to talk about how we come to the conclusion at the end and where we’re heading moving forward.

And the beauty of having your own blog is you get to write and publish whatever you want. I create content from my point of view and never claimed my writing was balanced. This site isn’t the ABC or some neutral FIRE outlet. I presented facts in that article with my opinion which I understand everyone isn’t going to agree with.

However, that topic was interesting to me (and a bunch of others) so if I’m offending you or you don’t like what I’m writing, maybe you should follow another FIRE blogger ✌

 

Franking Refunds Survived…For Now

Like Steven Bradbury before him, ScoMo and the Coalition skated past the ALP for a come from behind victory and with it, the franking credit refunds will remain for the foreseeable future.

This was a hot topic amongst the FIRE community and now that the election has passed, it seems like things should proceed as per normal right?

I mean, franking credit refunds didn’t get the chop so fully franked dividends are safe to retire on yeah…?

Well… about that

Whilst I think that the result of the election speaks volumes to where the majority of Australians priorities lie, I strongly believe that a lot of the policies the ALP were trying to win votes on will not be touched for a very, very long time. They were aggressive with their tax reforms, franking credit refunds being one of the smaller changes (CGT and trust distributions being a lot bigger).

This was supposedly the unlosable election for the ALP. Every poll in the country had them winning by a landslide. Sportbet even paid out on them winning two days early to the tune of 1.3M 😮

For them to lose in the fashion they did, especially after all the shit the Coalition has done during its previous term tells me that the majority of Australians did not agree with the policies they were proposing.

And it’s my opinion that aggressive tax reforms played a huge part!

Now I’m definitely not an expert on this subject and don’t know for sure (no one really does) but I doubt we will see such aggressive policies proposed by any party for some time. I’d almost bank on it that scraping franking credit refunds will not even be thought about in the next election. They’ll go after something else, that’s a given. But it won’t be the same policies that contributed to them losing the election this year.

Sidebar: I’m not here to talk about the policies or politics so for the love of God don’t @ me in the comments about it.

But that’s enough about the election.

Again, I really don’t like politicians in general and try to avoid talking about them as much as possible. I only bring them up because it’s important to set the scene for the decisions we’re making in regards to investing for financial independence which is what this blog is all about.

Which brings me back to the point about the franking credit refunds.

Whilst I truly don’t think any political party will go near them for a very long time. I also learnt something very valuable from that campaign policy.

The legislation risk associated with franking credits in general.

I was completely naive in thinking the government would not pull the rug out from underneath us and the refunds would be here to stay.

What a fool I am!

I’m just thankful we’re still in the accumulation phase and have a chance to mitigate this risk a bit moving forward (more on this below).

But wouldn’t it have absolutely sucked if you’d worked your whole life and built up a retirement fund utilizing franking credit refunds only for the government to turn around and change the rules on you!

The refunds are safe for now. But I plan to be retired for 50+ years. That’s a long time for people to forget what happened in 2019 and if I were a betting man, I’d wager that sooner or later, franking credit refunds will be back on the chopping block!

 

Are Aussie Shares Worth It Without Franking Credits?

The thing about franking credits for those who are chasing FIRE in Australia is that without the refund, they are worth a hell of a lot less and in some cases, will mean that you don’t receive any benefit from the franking credits at all.

Let me give you an example.

Mrs FB and I know that to fund our current lifestyle in Australia, we spend around $48K over the course of 12 months.

We plan to own a house one day, so if we remove our rent and add on a bit to cover rates, maintenance on the property, insurance etc, we get to around ~$42K at a guess.

The plan before the election was for us to split our dividend income 50-50 and pay ourselves the $18,200 (tax-free income threshold) each from Aussie franked dividends. Let’s assume that the dividends are fully franked.

We each would receive $18,200 in cash throughout the year plus $7,800 in franking credits each. This means that the ATO would look at us having a taxable income of $26,000 for that year (dividend plus the FC).

Here’s the math behind the grossed-up dividend.

Dividend % Franking Franking Credit Tax Before FC Tax After FC Grossed up dividend
$18,200 100% $7,800.00 $1,482 -$6,318 $24,518.00

The franking credits soaked up the owed tax of $1,482. This will still happen if the refunds were ever removed.

But more importantly, the franking credits refunded us $6,318!

Because we, as the shareholder, have already pre-paid tax @ 30% that was removed from the dividend before it hit our accounts. It’s only fair that this is recorded (the franking credit) and the ATO is aware of us pre-paying the tax so we can be refunded later if we paid too much tax for that year which in this example, we did.

This was always the intention of imputation credits. Not to only stop double taxation (which consequently it also does), but to ensure that income is taxed once by those obliged to pay it.

So the end result is around $24.5K each to fund our life after retirement.

That’s almost $50K! More than enough for us to live comfortably forever whilst factoring in inflation.

But if we remove the refund. We only end up with $36K between us.

That’s a whopping $13,036 dollars difference and means we need to head back to work. 

Or let me put it to you another way. You’re losing 28% of your return 💸

 

Tipping Point

I was on the fence for a long time before moving towards an Aussie dividend approach with Strategy 3.

A lot of people out there don’t realise that a major part of the dividend approach for me was not about total return. In fact, I even mentioned it in Strategy 3 that if I were to guess, I’d wager that Strategy 3 would slightly delay my FIRE date because of the less efficient tax method of income (dividends are less efficient vs capital gains) and less diversification.

We moved to Strategy 3 predominately because of the psychological aspect of receiving income that was not affected as greatly by human emotion (share prices) and is more anchored to business fundamentals (income of a profitable business that is passed to the shareholder via a dividend).

There have been great Australian based articles written that objectively looks at retiring on dividends vs capital growth and I constantly receive messages that link to studies showing superior returns for an internationally diversified low-cost ETF portfolio.

Guys, I’m a die-hard FIRE fanatic,

I’ve come across most of these theories and articles before! What’s missing here is the human element. We’re not investing robots. I’m not too fussed between minor differences in returns and place great value in simplicity and sleep at night factor.

I thought the trade-off of less international diversification and a slightly delayed FIRE date was worth retiring on dividends vs dividends + capital gains.

But everyone has their tipping point.

Without the franking credit refund, Aussie shares just don’t cut the mustard IMO.

The difference is just not worth it for us. But everyone’s circumstances are different.

For instance, those looking to retire on FATFIRE will not be as greatly affected by this change since they will have more of an income to soak up those credits.

And many people have rightly suggested to me that there are a lot of alternative strategies to generate unfranked income such as REITs, Bonds, P2P lending etc.

These are viable alternatives for some, but we want to continue investing in companies for now.

 

Mitigating Risks

Let me be quite clear.

I’m still a massive fan of the dividend approach.

But placing such an enormous amount of faith that politicians won’t change the rules around franking credits over the next 50 years just doesn’t seem logical to me.

I want to mitigate the legislation risk of a potential franking credit refund axing as much as possible but at the same time, continue our overarching investment philosophy of investing in great companies.

We want to reduce our portfolios franked dividends and take advantage of a more diversified portfolio again. Which means…

I kept the international part of our portfolio when we decided to focus on Aussie shares. And when the very real news of potential changes in franking refunds was mentioned, I felt such a huge sigh of relief knowing we still had some international exposure. I guess this just goes to show the power of international diversification. If one country stuffs something up, there’s plenty more out there so you’re covered… doesn’t really work if you’re all in on the one country though 😅

Given that I don’t think franking credits refunds will be there over the next 50 years (no refund for us basically means no credits at all). I would like to receive some income from international companies along the way. It’s not going to be as good as the Aussie yield, but it helps the situation and my sleep at night factor.

Also, with the help of capital gains, an internationally diversified portfolio according to almost every major study done of the subject, will reduce risk, volatility and increase safer withdrawal rates!

 

To LIC or Not To LIC?

This one’s quite straightforward. A LIC has to pay a fully franked dividend. An ETF does not. VAS, for example, has a franking % of around 70-80 % which means that part of the income is not franked.

As I detailed in my ETFs vs LICS article, they are so similar that we are basically splitting hairs when comparing the two. As such, the greater legislation risk associated with LICs to me has shifted my favour towards ETFs.

I want to make myself clear again. I’m still a fan of LICs. I love the dividends they produce and the two companies I’m invested in (Milton and AFIC) have goals that align with my own (to grow their income over time).

It’s just that A200/VAS are so incredibly similar but have the key difference in utilizing a trust structure and not a company. The legislation risk has tipped the scales in favour of ETFs for me moving forward.

This is purely a tax minimisation decision. It has nothing to do with changing the overarching investment principles (investing in great companies) or a shift away from Aussie dividends.

The FI Explorer wrote a great piece on a sceptical view of LICs which some of you out there have emailed me about. I agree with what is written in that article, always have. I never invested in LICs expecting a superior return. What I go back to is the mental aspect of investing. A lot of people who retiree will feel more comfortable living on a relatively stable smooth flow of dividends vs more volatility but a slightly higher return.

 

Strategy 2.5

Okie Dokie.

So here she is. The new…ish strategy moving forward.

It’s called 2.5 because it’s extremely similar to strategy 2 just with a few tweaks. It’s almost like we’re going back to strategy 2 and I didn’t think enough has changed to honour it with strategy 4.

Change 1

Firstly, with the addition of buying more international shares back in the plan, we will move back to a ‘split’ approach.

Our splits have changed slightly from strategy 2 with more of an emphasis on Aussie shares as the dividends are still attractive regardless of franking credits refunds.

We will be looking to maintain a split of

60% A200/VAS/LICs (Aussie)

20% IVV/VTS (US)

20% VEU (world ex US)

We’ll keep our two LICs in the portfolio but won’t buy any more units moving forward.

The plan when buying new shares is a lot easier than looking at when LICs are trading at a premium or not.

Before we buy each month, we will look at the current splits in the portfolio and purchase the shares which have the lowest targeted weighting.

For example, this is what our portfolio currently looks like.

So next time we buy, it will be to ‘top-up’ the lowest split, which in this case will be World ex US or VEU. The splits are all out of wack because we focussed on Aussie equities during the last 12 months. Ideally, you want to be as close to your splits as much as possible. When your portfolio reaches a certain point however, the market movements will be so great that you might find it hard to maintain your splits even by buying the lowest weighting split. But this will be a good problem to have since your portfolio at that stage will be in the 7 figures.

Something really cool about this strategy is that you’re always buying the split that is down. If one split booms but the others don’t, you won’t be purchasing more of that booming split.

Change 2

The second change we will be making is switching from VTS to IVV.

iShares Core S&P 500 ETF is extremely similar to VTS with a few differences but no major ones we’re concerned about. VTS is more diversified and 0.01% cheaper but is not domiciled in Australia and does not offer DRP. This means that we need to fill in the W-8BEN-E form every three years or so.

The W-8BEN-E form is literally 10 minutes of your time every 3 years and is often overblown in terms of effort, but nonetheless, the two funds are so similar that it’s worth saving the extra admin plus having the DRP option available which I’ve been looking to use as of late.

Here are their 10-year returns to just show how similar they are.

Change 3

The third part of the plan is a hybrid approach between relying only on dividends vs dividends and selling parts of the portfolio. IVV and VEU don’t pay a lot of dividends, but they still pay them.

IVV has returned 3.27% over the last decade and VEU has done 2.85%. Not great, but still cash flowing into the account. And more importantly, those dividends are unfranked income!

We will aim to not touch the portfolio and use the dividends from both Aussie and international shares to live on. If it’s a bad year, however, we will look to sell-off some units to cover the shortfall.

I’ve already gone into why selling parts of the portfolio is perfectly ok if you allow for it to recover in strategy 2. In fact, from a rational market point of view, there’s really little difference between selling units for income and having the company pay you via a dividend. In theory, both should have the exact same consequences. But markets are not rational so they vary to some degree and is a prime reason why we like the dividend approach more.

How It Works

Let’s look at how the newly allocated portfolio would have done during the last 12 months. Here, I have created a dummy portfolio with all trades done exactly one year ago with the total of the portfolio’s value being a cool $1M which is what we’re aiming for.

Aussie equities (I had to use VAS to go back far enough) @ 60%
US (IVV) @ 20%
World ex US (VEU) @ 20%

$46,809 worth of dividends ain’t bad and is more than of FI number of ~$42K!

Bumping up the weighting of Aussie shares to 60% (it was 40% for strategy 2), plus the lower dividend payments of our international shares have actually generated enough income for us to live off during the last 12 months.

But this was a particularly good year for Aussie shares and it won’t be this good all the time. We will save any extra income during those good years to create a cash buffer in preparation for the bad ones that will no doubt come.

If it’s a particularly bad year for dividends, we will look at selling off some units to cover our expenses.

The other thing is that the likelihood of us not earning any money in retirement is extremely low. I’ve covered this in what retire early means to us in the context of FIRE.

I’m extremely confident that the dividends from a $1M portfolio that is weighted to 60% Aussie shares plus any additional income will be more than enough for us.

Selling off units is there as an option but I don’t think we’ll need it tbh!

Time will tell.

To summarise strategy 2.5

  1. An internationally diversified portfolio consisting of 60% Aussie shares and 40% international
  2. Buying IVV instead of VTS moving forward for DRP and Australian domiciled.
  3. Buying Aussie ETFs and not LICs due to risks associated with franking credits. ETFs don’t pay fully franked dividends and are impacted slightly less in the event of legislation passing.

 

 

Stop Changing Strategies Dude!

This is you

“Man, you flip flop more than my thongs! Stick to one strategy mate and stay the course. If the axing of the franking credit refund caused you to change strategies, you were never in it for the right reasons.”

And this is me

“Yo! The overarching strategy of investing in great companies has never changed. There was definitely a major difference between strategy 1 and strategy 2. But the fundamentals from strategy 2 to 3 and now to 2.5 are exactly the same”

The thing is, investing in great companies should always be the number 1 goal. All this other shit comes later.

The issue with picking the good companies from the duds is that it’s really hard to do. Which is why index investing is so cool.

The tweaks between our strategies are really fine-tuning our portfolio to meet our specific needs in the following areas:

  1. Mindset/sleep at night factor
  2. Simplicity
  3. Tax minimisation
  4. Mitigating legislation risk (something I hadn’t considered before)

I think everyone should be a bit flexible with how they invest to a certain degree. Picking one strategy and literally not changing anything during your whole life seems unlikely. Franking credit refunds are a great example of this.

And what’s to say the government won’t impose some stupid tax on other asset classes or something else within our life?

It would be ridiculous to suggest that if the government turned around and started taxing Aussie shares an additional 30% that everyone should just ‘stay the course’ and not look at alternative methods.

Everyone has their tipping point when enough is enough. And even though the refund remains, for now, I’m looking at protecting against this potential rule change without drastically upheaving everything.

I think strategy 2.5 is a nice balance between everything that’s important to us in an investing strategy.

 

Conclusion

I’m still learning as I go.

Judging by some of the emails I get, you’d think that I’m some sort of investing guru which couldn’t be further from the truth.

This years election taught me a valuable lesson that I hadn’t considered as much as I should have before.

The legislation risks for investing in general but particularly the very real possibility of no more franking credit refunds one day.

For us and I assume a lot of people chasing FIRE, franking credits without the refund in retirement won’t be worth the concentration risk or the ~4% yield (still pretty good) when you consider that you’re losing up to 30% of your return due to the additional tax that you otherwise wouldn’t be paying had you invested in something other than franked dividends.

Although not completely, Strategy 2.5 mitigates this potential change by re-introducing international shares back in the portfolio which reduces our reliance on Aussie dividends. It also makes other small changes as mentioned above.

When we made the shift away from property to focus on shares, the number 1 goal was to invest in great companies. None of this other stuff is as important as that. Index investing means we don’t have to research which companies are going to be good or bad. It filters that stuff out for us.

Because we don’t have to worry about choosing the good companies from the bad, we can instead spend our time to tweak our strategies so they align with what’s most important to us.

Mrs FB and I optimise the portfolio to improve these areas:

  1. Mindset/sleep at night factor
  2. Simplicity
  3. Tax minimisation
  4. Mitigating legislation risk (new)

Strategy 2.5 improves on all of these areas whilst not uprooting our investing fundamentals which is what any good tweak should do!

That’s it for now.

Let me know what you think in the comment section below 🤙

 

Spark that 🔥

ETFs vs LICs and Strategy 3 Revisited

ETFs vs LICs and Strategy 3 Revisited

Okay, so if you’ve been following me for any length of time you probably know that I’m a big fan of ETFs.

You know, those little exchange-traded funds that grant instant diversification with rock-bottom management fees to provide a great return for extremely little effort. It’s no wonder that famous investors like Warren Buffet and Mark Cuban (US billionaire) are also big fans.

Buffet has been quoted as saying:

“Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time.”

I wrote about the benefits of index investing briefly in ‘Our Investing Strategy Explained‘ post.

I’ve been a big fan ever since reading the Bogleheads Guide to Investing about 3 years ago. And I put my money where my mouth is and currently have over $160K invested in ETFs.

 

“So if ETFs are so great, what the hell are LICs and why should I care? “

 

I’m so glad you asked.

Let’s begin.

 

Listed Investment Companies

GuideToLICs2

FYI when I refer to LICs, I’m referring to the older ‘granddaddy‘ LICs like AFI, ARGO, Milton etc. 

 

Listed Investment Companies (LICs) are first created by an initial public offering (IPO). Money is raised and a fixed number of shares are created for each investor. The money raised is then used for investing in assets such as a basket of shares which together make up the net asset value (NAV) of the LIC.

The shares of the LIC are traded on the stock exchange where investors are able to buy and sell when the market is open.

Sound familiar?

It should because, in a nutshell, ETFs are essentially doing the same thing. But there are key differences.

 

 

Key Differences

There may be more differences than what I’m about to go over, but the ones below are the key differences in my eyes and the ones that reflect my investing decisions.

Same but different

 

Management Fees

ETFs tend to have a lower MER than the equivalent LIC but it’s not as bad as it sounds. If you stick to the older LICs (Argo, AFI, Milton etc.) the highest MER is around 0.18% which is not that bad. It’s still more than double that of an Australian index ETF such a BetaShares A200 (0.07%) though.

The management fees reflect the investment style of the two structures.

ETFs track an index or benchmark whereas LICs try to outperform the index. But given the low MER of the older LICs, some active management is acceptable in my view. I only have issues where the fund managers charge > 1.0% for their services.

WINNER: Generally ETFs

 

Legal Structure/NAV

ETFs are a trust structure whereas LICs are a company as the name ‘Listed Investment Company‘ would imply.

This has some semi-big ramifications.

I’m going to try to keep to as simple as possible because we’re about to get technical here for a second.

To truly understand the differences between ETFs and LICs we must first understand how they operate and what’s the difference between Open-End and Closed-End

Closed-Ended

LICs are closed-ended.

This means that when the LIC had its IPO and raised the capital to start the company, a certain number of shares are issued. Once the company has been established and begins investing the capital on the behalf of shareholders, no more shares are issues. New investors wanting to join the LIC have to buy already issued shares on the exchange. The LIC does not create new shares to deal with demand.

Imagine a new LIC that has started with 4 investors each putting in $1. The LIC currently has a Net Asset Value (NAV) of $4 and there are 4 shares issued to each investor.

Fake LIC

Those four shares that own the LIC are each worth $1 according to the NAV. But those shares are bought and sold on the market. And depending on how bullish or bearish the market is on Fake LIC, will determine how much the share price will drift away from its NAV value either up or down.

If someone offers 1 unit of Fake LIC for 80c, this is what’s called trading at a discount. If someone offers the same unit for $1.20 it’s known as trading at a premium. LICs can drift away from the actual NAV quite a bit.

Can LICs ever increase the number of shares? Yes, they can raise capital and issue new shares just like any other company but this only happens every so often and not something that’s done daily like ETFs.

 

Open-Ended

ETFs, on the other hand, are open-ended and can create or redeem new shares in accordance with the market demand. If someone wants to enter the fund, they don’t need to trade with a current shareholder of the fund (like the LIC does). The fund can create a new share.

Conversely, if someone wants to cash out their share. The fund has to come up with a way to get the cash which may mean selling assets within the fund to give the investor their money.

But who sets the price of each unit? 

When an Investor wants to buy or sell their units on the exchange, there is a market maker on the other side of the trade. The price they offer is generally very close to the Net Asset Value of the fund.

This is why you can’t really trade an ETF at a discount or premium to the NAV.

WINNER: LICs. The ability to trade at a discount is desirable but the company not having to sell assets during a crisis to meet demand is a big plus. 

 

Investment Style

Traditionally ETFs track an index or benchmark whereas LICs try to outperform the index.

If you actually look into what is in the portfolios of Australian ETFs such as A200 or VAS and compare them with the old LICs, there is a lot of crossover. The whole active vs passive debate is more of a debate when the active fund managers are charging big fees (>1.0%).

I’ve got no issues with a little bit of active management as long as the MER is low. In fact, I like that most of the ‘Grand Daddy’ LICs have a focus on income. This is important to me and something that is reflected with historic returns for those LICs (more on that later).

One issue I do have with LICs is that they can and sometimes do change investment style. The fund manager that has a fantastic track record might retire or get offered a higher wage at another fund. I personally like the fact that most ETFs are legally obligated to track an index and can’t diverge from that strategy no matter what the managers are thinking.

Some would argue that being able to see waves in the market and adjust accordingly is a good thing.

WINNER: Tie. I prefer to track an index but don’t mind a little bit of active management as long as the fees are kept to a minimum. 

 

Retained Earnings

ETFs are a trust and they must distribute their income each year to unitholders. The income from assets within the funds such as dividends, get passed directly from the fund to the unitholder.

ETF Income flow

Because LICs are a company, they can receive income from the assets they own (usually dividends from shares), pay the company tax rate of 30% and keep that income in the fund for as long as they want. Then at a later date, the manager can decide to pass it on, usually as a fully franked dividend to the shareholders of the LIC.

LIC Income flow

This means that the income from ETFs are often lumpy and inconsistent because the market may do well some years and bad others. But if the LIC retains some income from the good years, they can distribute it in those bad years to make it more smooth and consistent.

Sounds like a good thing right? 

This one is something that’s been on my mind for a while.

The ‘smoothing’ of income is often touted as a benefit whenever any debate comes up between ETFs and LICs.

I beg to differ.

I personally don’t want the LIC to retain any of my income. I would much rather they pass on every single dollar to me so I can make the judgement call on what to do with it whether that be reinvested or spent.

This might be a plus to some but it’s an annoyance to me and something I really wish they didn’t do.

WINNER: ETFs. This is my personal preference. 

 

DSSP/BSP

Without going into too much detail, Dividend Substitution Share Plan (DSSP) and Bonus Share Plan (BSP) are offered by two LICs (AFIC and Whitefield respectively). It’s basically a plan offered by those two LICs which allow the investor to forgo the dividend in exchange for extra shares.

This means you don’t pay income tax and get more share instead. It’s great for high-income earners.

This is not offered by any ETF and is unique to the two LICs mentioned above.

If you want to read more about it, check out fellow FIRE blogger Carpe Dividendum’s excellent article.

WINNER: LICs

Fully Franked Dividends

This is actually not a difference but I want to clear up a common misconception about the franked dividends that LICs are able to pay out.

Some investors think that LICs can magically produce more income from the same basket of shares because they often pay out a fully franked dividend whereas an equivalent ETF might only distribute a partially franked dividend.

Let’s say for example that a LIC and an ETF both invested in the same company that paid out an 80% franked dividend of $70 dollars.

Here’s how that money would reach the investor using a LIC.

LIC Franking

Note that the end result for this investor who is in the 37% tax bracket is a grossed-up dividend of $59.22 after tax.

 

So how does it play out in an ETF structure?

ETF franking

 

The end result for the investor is exactly the same. A grossed-up dividend of $59.22 after tax.

WINNER: Franking does not matter when comparing LICs to ETFs.

 

In a nutshell, the key differences are:

Type Management Fees (MER) Investment Style Legal Structure Net Asset Value (NAV) DSSP
ETF As low as 0.04% Passive. Usually tracks an index and does not seek to outperform. Trust Trades on, or very close to NAV No
LIC Although slightly higher for an equivalent ETF, the old LICs generally are all under around 0.18%. Active. Seeks to outperform an index over the long term. Company Can trade at a discount or premium to the NAV of the fund. Yes

 

So Which One’s Better?

HomerThinking

If you’ve made it this far, I can almost hear your cries.

‘Just tell me which ones better FFS!’

After consuming all that info above, you’ll be rewarded with a clear and concise answer as to which investment is superior and what you should do.

And here comes the most annoying answer…

They are both great.

Both have pros and cons but either ETFs or LICs are suitable for FIRE chaser in Australia looking to generate a passive income. The most important thing is to understand the pros and cons for yourself and then you can make an informed decision as everyone’s needs, investment style, and appetite for risk are different.

The last point is often overlooked, it’s not so much about trying to achieve the maximum return in my eyes. It’s about choosing a strategy that will generate that passive income but more importantly, a strategy that you’ll be comfortable with through thick and thin. Because any portfolio is easy to hold in a bull market (see negative gearing). But it’s when the shit hits the fan that you’ll really appreciate a well thought out strategy that you’ll feel comfortable in when everyone else is running for the exit.

 

Conclusion

Peter loves Homer

ETFs and LICs are similar yet different. They shouldn’t be seen as enemies, more like best friends and depending on your mood, you might want to hang out with one or the other…maybe there’s room in your portfolio party for both?… Which leads me to talk about…

 

Strategy 3?

If you have read ‘Our Investing Strategy Explained‘, I have been thinking more and more about a dividend focussed portfolio which mainly consists of Aussie shares since they offer a great yield plus franking credits. They certainly feel like the ultimate passive investment to fund early retirement. And our end goal, after all, is to create a passive income stream to retire on.

So after much research, learning from other dividend focussed investors such as Peter Thornhill and Dave at Strong Money Australia and much toing and froing, I have decided to direct all future capital into high yielding Aussie shares in the form of ETFs and LICs.

We currently have nearly $100K in international securities which makes this decision a little bit easier. We are basically accepting the risk of lesser diversification in order to gain a higher dividend yield through Aussie shares.

I completely understand the risk and acknowledge that an internationally diversified portfolio will most likely outperform an all Aussie one in terms of total return. However, I’m confident in saying that the international portfolio will not offer the same level of dividend yield that the Aussie one will.

I wrote a little bit more about my reasoning to move to strategy 3 in our September 2018 Net Worth Update.

 

Historic Returns

I would like to take a second to illustrate just how similar the returns are between most of the older LICs and Australian Index ETFs.

I’m going to be using the historical data of Vanguards VAS ETF because the A200 was only created this year and VAS has been around nearly 10 years. Since they are so similar it should be a fair comparison. And I’m choosing 4 of the most common older LICs for comparisons.

Below are the returns for investing $1M on the 21st of May 2009 (creation date for VAS) in each of the LICs and VAS.

LICs VAS Returns Historic

It’s no surprise that the majority of the LICs returned more dividends than VAS. This is their main focus after all and a primary reason I’m investing in them.

Argo was a surprise returning significantly less than the others in terms of capital gains and dividends.

Maybe even more surprising is that VAS is smack bang in the middle of the pack for total returns. I guess that this just further illustrates that it’s hard to beat the index consistently over a long period of time. Some LICs might be able to do it (in this case MLT and BKI) but others won’t.

 

ETFs AND LICs?

Yes, I’m utilising a combination of an ETF and LICs for the Aussie portion of my portfolio which is what I have decided to focus on for the foreseeable future.

Here’s how it’s gonna work.

I will be purchasing either one of two LICs or one ETF once a month to the tune of around $5K.

 

Why 1 ETF and 2 LICs?

I have already been into why I think ETFs are so great if you’re looking to get exposure into the Aussie market and want to invest in an index style. BetaShares A200 or VAS are the obvious choices in my opinion and with the A200’s MER being half the price of VAS, it’s a clear choice for me.

One of the biggest pros for ETFs for me is that they do not try to pick winners and divulge from an indexing strategy.

LICs, on the other hand, can and do suffer from a fund manager change or investment style redirection.

This scares me.

To mitigate this risk, I’ll be spreading our capital out between two LICs even though what they’re investing in is incredibly similar and might look silly from a diversification point of view. But I don’t really care if others think it’s silly, if it helps me sleep at night then it’s all gravy baby!

The other reason I’m buying multiple LICs is to have a greater chance to be involved in a Dividend Substitution Share Plan.

So what am I buying and how am I deciding what to purchase? 

ETF

A200
MER: 0.07%
Benchmark: Solactive Australia 200 Index

Why it’s in our portfolio:
BetaShares A200 made it’s way into our portfolio last month after Vanguard failed to respond and lower their management fee for VAS which is currently double that of the A200.

Given that the returns for the last decade between the ASX200 vs ASX300 (pictured below) were incredibly similar.

A200vsA300

Source: https://au.spindices.com/indices/equity/sp-asx-300

I’m choosing the ETF with the lower management fee every day of the week.

 

LICs

AFI
MER: 0.14%
Benchmark: XJOAI (ASX:200)

Why we will be investing:
Other than being a dividend focussed LIC with a MER of 0.14%, AFI is only one of two LICs that offer DSSP. The other LIC is Whitefield (WHF) and that has a MER of 0.35% which is too high for my liking.

A very good detailed review about this LIC can be found by the ever so insightful SMA. Check it out.

 

MLT
MER: 0.12%
Benchmark: XOAI

Why we will be investing:
Milton’s very low MER of 0.12% was attractive and we needed to spread our risk across another LIC so after much research, Milton it was. Milton also seems to be a bit more on the active side compared to the other older LICs which is another hedge against something happening with the index.

Full SMA review if you’re interested.

When To Buy?

So if I’m going to be directing all future capital into Aussie shares through LICs and A200 ETF. When do I know which one to buy since they are all essentially the same investment (Aussie shares)?

Here’s what I’ll be doing each month when we have saved up $5K and are ready to invest:

  1. Check both AFI and Milton’s NAV compared to their share price on the ASX to see if they are trading at a premium or discount (currently developing a web app to make this easier)
  2. Invest in whichever LIC is trading at the biggest discount
  3. If both LICs are trading at a premium, buy A200

 

That’s It…For Now

As of writing this article, for my circumstances and goals, I believe that an Australian based portfolio consisting of ETFs and LICs is the best strategy to produce a passive income for me to achieve financial independence so I can have the freedom to retire early.

But as I’ve always said, if I come across something that’s better than what I’m doing, I’ll make the switch.

My mind is always open to new ideas and strategies.

But that’s it for now… until strategy 4 rears its head 😈

 

UPDATE: We have officially moved to Strategy 2.5 in Sept 2019

Vanguard Diversified Index ETFs

Vanguard Diversified Index ETFs

*Nothing written below is financial advice. Always do your own research when dealing with your finances

One ETF to rule them all?

OneETF

The majority of the Australian FIRE community roughly subscribes to one of the three combos when it comes to ETFs:

  1.  40% Oz shares (VAS or AFI) 60% international (VGS or equivalent)
    • Pros
      • Great exposure to the entire world with enough Australian shares to take advantage of franking credits
      • Don’t have to fill out a W-8BEN form every couple of years
      • Hedged against the Australian dollar
      • DRP option available
    • Cons
      • Highest management fees (0.164% assuming the above weightings) out of all the three options (more on this later).
      • Have to manually rebalance
  2. 40% Oz shares (VAS or AFI) 60% international (VTS+VEU)
    • Pros
      • Great exposure to the entire world with enough Australian shares to take advantage of franking credits
      • Low management fees (0.101% assuming the above weightings)
      • Greater diversification than the other two options
      • exposure to emerging markets
    • Cons
      • Extra admin to fill out W-8BEN form (less than one hour every few years)
      • DRP option only available for VAS, not VTS or VEU
      • Potential estate issues when you die for VTS and VEU units
      • Have to manually rebalance
  3.  100% Oz shares – Dividend focussed (VAS or AFI) (Thornhill approach)
    • Pros
      • Take full advantage of our unique franking credit systems in Australia
      • Dividends are less likely to be affected during a downturn
      • Hedged against the Australian dollar
      • Don’t have to fill out a W-8BEN form every couple of years
      • Low management fees (~0.14%)
    • Cons
      • Not diversified outside of Australia
      • Miss out on international market gains
      • Capital gains traditional low for this strategy
      • Home bias

All three strategies have their merits but they all require rebalancing with the exception of an all Australian ETF. The issue with that strategy is, of course, you don’t have much diversification as Australia is only roughly 2 percent of the world economy. And with how much private debt Australians have right now… if Australia went through a recession the all Australian portfolio would not fare well.

The point is that each one of these strategies is missing something and require manual intervention whether it be rebalancing, extra admin work or more diversification.

Wouldn’t it be good if there was an ETF that took care of all this for you?

 

Vanguard Diversified ETFs

 

Vanguard Diversified ETFs

So what are they exactly and what’s the difference between buying this ETF vs one of the three options mentions above?

To put it simply, any of the four diversified index ETFs above offer a complete one stop shop solution for anyone looking to invest.

They solve a few problems that our three options above had

  • Diversification – Exposure to over 10,000 securities—in just one ETF.
  • Auto Rebalancing
  • DRP option
  • Hedged against the Australian dollar*
  • It wasn’t listed above as a con, but all four diversified index ETFs are actively managed using Vanguard Capital Markets Model (VCMM)

The two big ones that stand out are of course the auto-rebalancing but also maybe surprisingly the active management component.

Rebalancing is not hard to do, but it’s something that if left unattended can most certainly affect the performance of your portfolio over the long term. As for the active management component. You may be wondering why there is any management at all? I thought Vanguard is all about minimal management to keep fees low and it’s really hard to beat the index anyway??? I’m not sure about this part beating the market either but I guess we will have to wait and see how it performs. It uses a modelling system called VCMM to simulate potential outcomes and pick the correct balance for your desired portfolio out of the four options above.

VCMM

*As pointed out by Chris in the comments. The diversified ETFs are not 100% hedged. Please check the PDS for each ETF to find the amount of hedging

Who Is This Suited For?

To be honest, it’s a bloody good product for 99% of people. What they are offering here is as close to the perfect ETF as I’ve ever seen given the management fees and what it offers.

The best thing about this ETF is how idiot-proof it is. A complete n00b could buy one of the four diversified ETFs (depending on their investor profile) for the rest of their life and get respectable returns with minimal effort.

People avoid things that appear confusing and hard. That’s why Robo investment companies like Acorns and Stockspot are in business. They essentially are providing what this ETF is providing at additional costs because they make investing super easy and friendly. With the other three options listed above, it can be daunting to explain to a complete n00b how to rebalance. As soon as they don’t understand something, the majority of the time they can get spooked and give up altogether.

That’s why this ETF is so special. You can confidently recommend this product to anyone and be sure that they can’t stuff it up or get confused.

  1. Set up a broker account
  2. Buy this ETF when you have the money to do so
  3. Turn on DRP if you want
  4. Do tax when it comes around
  5. Repeat forever

So if this ETF is suited for 99% of people, who is the 1%?

 

Why I Won’t Be Switching To These ETFs

This is something I have been wanting to bring up for a while now.

Has the Australian FIRE community forgotten just how important management fees are?

I have been seeing a lot of people recommend VDHG, which as I have mentioned above is a fantastic product. No doubt about it.

The only issue I have is that at a MER of 0.27%, it’s more than double that of what my MER currently is (0.101% or option 2 above).  They are both very low fees, but I plan to have a portfolio of a million+ within the next 5 years and hope to live for another 50 years at least! Now even though the management fees are very low, over a long period of time it does add up!

I have actually been working on a web app recently (so close to being published) that works out lost investment potential from management fees which gives you a visual of what I’m talking about.

combo1

Management fees are unavoidable, but how much you pay is your choice to an extent. I have calculated my current investment potential loss from management fees to be $48K over 50 years at $1M invested.

If I change the management fees to be 0.27% we get the following

combo2

Holy shit!

We went from paying under $50K over 50 years in investment potential loss from management fees to over 5 times that amount at over $250K!

Ok, I need to clear a few things up about the above graphs because it’s a big deal.

What am I actually talking about when I say investment potential loss? I’m referring to how much management fees are costing the investor when you factor in that the money paid to management could have been invested and compounded at 8% return (that’s what the graph is using as a return rate).

If I had $1M in my portfolio with my current weightings I would be paying Vanguard $505 a year. If I had $1M with any of the diversified index ETFs, I would be paying Vanguard $2,700 a year.

The difference between $505 and $2,700 a year over a lifetime adds up!

 

Conclusion

If you’re reading this blog, odds are you’re somewhat interested in personal finance and investing. The question you need to ask yourself is whether or not you are willing to learn, educate yourself and do the extra things required for the lower MER ETF options. Or if you think that the higher MER for the diversified index ETFs are justified. I personally choose to keep my MER as low as possible because paying less in management fees is a guaranteed return. You could argue that the diversified index ETFs will outperform my ETF combo but that is unknown without a crystal ball.

If you don’t know what half of the words in this article are even about, then the diversified index ETFs are most likely the best ETF for you. Just pick your investor profile and off you go. And don’t sweat the extra management fees. If the simplicity of the diversified ETF gets you into investing, you’ve more than made up the difference.

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