Quick answers to six financial roadblocks

  1. I don’t have enough money to invest…. Get ACORNS -it’s a micro-investing platform where you can invest in the sharemarket for as little as $5 a month!
  2. I don’t know how to save… You don’t need to! Splash out on the future you by spending on yourself first and put your cash into difficult to access high-interest savings or investment accounts.
  3. I spend all my money shopping… Cut up your credit cards and store cards. Only carry cash. How easy is it to spend now?
  4. I don’t have time to sort out my finances… Start small – 5 minutes a day writing down your expenses. Consciousness is a key. A few hours now tracking expenses, writing up a budget and automating your investing is like paying yourself thousands of dollars per hour in future gains. Not doing it means your pissing that money away.
  5. I don’t know where to startStart with taking lunch and a refillable bottle of water. Put the money you would have spent into a HISA or old-school piggy bank.
  6. But the market will crash… It will. Take a breath. Then stick to your plan. Sharemarket dips are an opportunity to buy in at lower prices, and they have invariably recovered. No one retires early from the interest on CD/savings accounts.

 

Are there any other big financial roadblocks you have simple answers to? Let me know!

Advertisements

7 Little Changes that Sparked the FIRE

It’s been about 18 months since I jumped on the FIRE bandwagon and realised I wasn’t all that keen on gorging myself on debt and plasma screens till I collapsed. These are the 10 changes I made that have set me up for the future:

  1. Figuring out where all the money went – tracking all of my expenses for a month gave me a really powerfully insight into where it was all going, and just how much I was tossing away on crap that brought very little value. Getting into the economics-trained mindset, there was very little gain from a significant amount of financial outlay at a massive opportunity cost (ie. an early retirement!). Now I use a detailed FIRE spreadsheet to track how I’m progressing towards my financial goals.
  2. Taking lunch – $10-20 bucks a day on lunch and coffee adds up to an awful lot of future relaxing lost. Getting some decent tupperware and spending an hour or two during the week prepping a week of decent lunches is one of the best investments you can make. Not only is the food likely to be healthier, it means you can avoid lots of other frivolous spending opportunities by not having to visit food courts and malls, and free up some cash for investing. Plus you can instead take your lunch to a sunny park or chill on a bench chatting to a friend – cheaper, healthier, happier.
  3. Telling people I was going to retire after 15 years of work – making it public firstly gives you a great justification for adjusting your lifestyle and people have a way to comprehend the changes be it suggesting what people perceive as cheaper alternative options, bringing lunch, drinking cheap beer, ditching the car, not constantly updating the waredrobe, and secondly publisicing is a massive motivation to stick to the challenge, especially with so many naysayers!
  4. Fixing everything – youtube has an insane amount of videos on how to fix so many things, and whilst it is a small time investment initially, it works out incredibly cheap in money and time to repair most things yourself rather than replace.
  5. 4603522314_76dd819095_bWorking with my after-save pay – when I first started saving with a full-time paycheck, I tried to think of my pay in post-savings terms. If I wanted to save $300 a fortnight, then I didn’t earn $1800, instead I earned $1500. Then I had to figure out how I could work around this figure. In my mind I was able to subsist on less than a $800 a fortnight at uni, so it was possible, and made saving the priority.
  6. Scrutinising the car – when I first got a car it was fantastic, I could go anywhere, it was generally quicker for longer trips and could carry much more than a bike! Then the costs started piling up, and the belly fat. When I got all the costs down on a paper I realised I really needed to investigate other options. Now I use a combo of cycling and public transport to get the work. It takes about 20 minutes longer than driving, but instead of sitting in traffic, I’m exercising and reading. And saving a bucket load of pineapples.
  7. Getting to grips with index and managed funds – despite doing an economics and business degree, I didn’t fully understand the ins and outs of these investment options, particularly in terms of long-run returns, fees, investment types and the best way to get into them. I ‘m not expert, but I figured out that getting in with the minimum investment into a broad-based sharemarket tracking (index) fund with low fees is not a bad start. Then adding to it on a very regular basis to smooth out the highs and lows (known as average cost investing) is a pretty low-risk way to build them. Currently I have an international hedged index fund, ethical ASX managed fund and a bond fund which I contribute to each week via automatic transfers. Slow and steady wins the race (hopefully!).

 

 

Taming expenses – the key to financial independence

Why would someone on $250,000 a year never be able to retire? Because they’re spending $260,000. They’re always chasing debt.

At a certain level of income, your basic needs are met – food, housing, clothes, utilities,
public transport. If you earn beyond this level of basic needs, it’s up to you as to how soon you reach financial independence. Every dollar you earn above your basic needs is a choice between spending the dollars today, and investing the dollars in your future. It is a careful balance, requiring some planning and a little bit of willpower. The truth is that most people on an average income can reach financial independence or retirement a lot earlier than they may assume and it all comes down to expenses.

Here are some very basic calculations I did to see how my expenses would impact my
financial independence. For these, assume a withdrawal rate of 4% (ie. how much you withdraw from your wealth each year post-retirement) and a real interest rate about 3% (ie. how much return you receive on investments above inflation). These are true for all levels of income after you first begin saving:

  • If you spend 100% and save/invest 0% of your earnings, you will never retire!
  • If you spend 90% and save/invest 10% of your earnings, you will reach financial independence in 70 years
  • If you spend 75% and save/invest 25% of your earnings, you will reach financial independence in 40 years
  • If you spend 50% and save/invest 50% of your earnings, you will reach financial independence in 19 years
  • If you spend 25% and save/invest 75% of your earnings, you will reach financial independence in 7.5 years
  • If you spend 10% and save/invest 90% of your earnings, you will reach financial independence in 2.7 years

After seeing these numbers and adjusting for different incomes and expense levels, I realised two key things:

  1. Your savings rate is key to financial independence. Depending on your situation, improving your savings rate (% of income not spent) may be more easily achieved by either earning more and maintaining expenses or by spending less and maintaining earnings. My current income as a full-time teacher allows me to easily meet my basic needs and more, so I have found that cutting $100 from my regular expenses is more easily achieved than regularly earning an extra $100 (up to a point!). For an extreme example of expense minimisation and achieving early retirement, check out http://earlyretirementextreme.com/ . This level of cost-cutting is not achievable or desirable for everyone, but it does give some insights into the importance or the savings rate and how to find ways to significantly reduce expenses.
  2. An additional dollar saved is more powerful than an additional dollar earned, in
    the quest for early retirement. To understand this requires a little maths. Lets say you’re saving 0% and then you cancel your unnecessary, expensive cable and gym memberships and now you’re only spending 80% of your income, your savings rate is 20%. But your mate who also saves 0% thinks that’s a terrible idea and instead takes on additional work which increases their income by 20%, and they don’t increase any expenses, their savings rate is only 16.5%. Looking at the calculations above, its clear to see you will be retiring before your mate, even though they’re on an income 20% higher than yours.

What is best for you will depend both on your current level of income and expenses, and which approach to increasing the savings rate is most easily attainable whilst maintaining a sufficiently good quality of life. Though for many people, myself included, there are ample opportunities to reduce expenses and improve our savings rate to achieve our wealth and retirement goals sooner.

A simple calculator play around with to understand the impact of savings and expenses can be found here – http://mustachecalc.com/#/calcs/time-to-fi and I have a bunch of other useful tools described on my page: 10 great tools for crunching the numbers.

 

pineapple-wallpaper-vintage

Calculate your way to financial freedom – 10 great tools for crunching the numbers

I love numbers! And I really love playing around with calculators and spreadsheets to help me plan and manage my money. Here are some of my go-to tools for planning:

Calculating Your Net Worth

Determining your net worth (total assets less total debts) is a really powerful way to get an overall sense of your financial position. You don’t need a calculator to do this – in fact write it down on a big piece of paper will make more of an impact (here is ASIC’s online one anyway. This number gives you a clear understanding of where you need to focus your money goals – debt reduction or wealth building. Armed with your net wealth, income and investment returns, you can use the tools below get a better sense of when you might reach the holy grail – financial independence (and early retirement)!

Budgets Are Sexy Spreadsheets

As my go to, big-picture financial tracker which helps to motivate me to save and invest to reach my early retirement goal, I use the BaS Early Retirement Spreadsheet (.xls download). There are a bunch of other spreadsheets compiled by this blogger which can be found here Best Budget Templates.

ASIC’s Money Smart

The ASIC Money Smart website has some excellent calculators which are handy to get a sense of how changing your spending/saving/investments/super will impact your wealth in the long term.

To check out the list of calculators and tools go here: https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps

Some of the top picks are:

Other handy calculators:

I’d love to know if there are any great tools, apps or calculators you use to plan and manage your path to financial freedom.

koala-1259681_960_720.jpg

Big tax rebate for educators, nurses, scientists and mathematicians

Have you recently completed a degree in teaching, early childhood education, nursing, mathematics, statistics, science or midwifery AND since become employed in a job that matches your degree qualifications? If so, then you are probably eligible to have your HECS-HELP tax that gets taken out of your pay, returned to you for up to 260 weeks (5 years).

Whilst it is great to get rid of your HECS-HELP student loan, unlike those in the US, the cost of the loan in Australia is relatively cheap (that said, the actual loan itself is often very big!) – it increases by the CPI every year, which was 1.7% in 2015, making it the cheapest loan you will ever get. This means that if you can make more than 1.7% returns from investing your money rather than paying your HEC debt, it makes sense to get the refund and invest rather than paying down your HECS.

How would you go about making more than 1.7% on your money? It’s not particularly hard, just open an online savings account (think: ING, uBank), and you are likely to make over 3% (or a real return of nearly 1.5%). If you invest in an index fund that tracks the market, on a long-term average you are likely to make 5-7% (with a real return of 3-5%).

For more info check out the official ATO website, which includes the application process, or StudyAssist which provides additional details.

This scheme could help you put $10,000+ dollars back into your pocket in the early part of your career and financial journey, right when you need it most.

kangaroo-543613_960_720.png

How I save and invest

I love to research. I read the PDS (product disclosure statements) of all the potential financial services I choose. I like to know what I’m in for. So based on the many hours of research I’ve undertaken, here are the accounts I use to manage my money and future…

  1. Everyday account – ING Direct: I use a combination of a regular Orange Everyday account. By depositing my salary in there, I get 2% cashback on payWave/TapnGo purchases under $100 (which is about $300 per year – a pretty good return for tapping!), and free cash withdrawals at any ATM in Australia (they refund the cost of withdrawing back to your account instantly), which comes in handy very often –> in total these benefits save/make me about $500/year. 
  2. Savings account (emergency cash) – ING Savings Maximiser: This account in linked to my Orange Everyday, and by depositing my salary (or more than $1000/month from an external account), you get 3.50% interest, which is the top rate you can get in Australia at the moment aside from term deposits greater than 12 months. The added benefit is it is instantly accessible, and the ING app is extremely easy to use.
  3. Investments – Shares: I don’t invest in individual shares. I don’t have the time or nerves to deal with that. Instead, I use both a passive and actively managed funds to (hopefully!) make my money work for me. For my  passive (‘index’) fund, which includes investments in a broad array of large company shares that effectively mirrors the movement of large sharemarkets, I use the Vanguard International Shares Index Fund (Hedged). This is ‘hedged’, meaning that it roughly avoids the impact of exchange rate fluctuations, and only increases/decreases due to share movements. I also have money in an actively managed fund, which might make other personal finance blogs squirm in their virtu-worlds, but it is to help align my investments with my ethical views. The second investment fund that I use is Australian Ethical’s Australian Shares Managed Fund, which avoids investments in environmentally and socially degrading companies and has performed extremely well over the past couple of years, even when fees are considered (relatively high compared to index/passive funds). I have an automatic transfer that sends a set amount into these funds each week. This helps to smooth out the ups and downs of the markets and ensures instead of trying to play the market, I focus on building my wealth.
  4. Investments – Acorns: I have recently started using this app and I can say it is excellent. It allows you to either invest a small ($5 and above) amount on a regular basis (daily to monthly) or to ‘Round-Up’ your expenses to the nearest dollar and invest the difference – this requires you to link it to your expenses account. The fees are relatively expensive, $1.25/month up to $5000, then 0.275% when above $5000. Despite this, it has gaming elements and shows real-time performance of your investments. It allows you to pick a specific investment profile with a varying mix of shares and bonds, which will depend on your appetite for risk and investment timeframe. I like it for the ability to invest small amounts daily and to watch your money working.
  5. Superannuation – First State Super: If you haven’t rolled your super into one account yet – stop reading now and do it! (Check out the ATO SuperSeeker to do it online – you will need to signup for myGov). I would then suggest going with your industry’s super fund, as high fees of many funds significantly reduce your final superannuation balance. I go with First State as it is the teacher’s super fund, and I have a split 50% Diversified and 50% Ethical Diversified balance  – with the ethical fund performing better over the past few years!
  6. Credit cards – 28Degrees: This is the card to use for international purchases. I only really use it for automatic bills, when I purchase online and on overseas holidays. When travelling overseas, load it with cash so it has a positive balance to avoid interest charges.

Check these out for yourself, they have really helped me to consolidate and grow my wealth. Any suggestions for things you use to help manage your finances and accounts let me know!

Housemates for healthy pockets

Housing is one of the three major expenses for most people, so sharing housing is a smart way to minimise this cost, whilst getting the benefits of sharing the housework and (hopefully) building great friendships. I currently live in a four bedroom house with a nice garden, in one of the most expensive cities on Earth, about 15km from the CBD. My housemates include a teacher, bike shop owner, performing arts educator, lawyer and renewable energy engineer, which brings a nice diversity to the skills, knowledge and interests in the house, which is especially good for crosswords.

I wanted to share a couple of great things about how our house operates that has developed over a decade of sharehousing with friends. These approaches to important elements of the house give us all more money for our future and more time to enjoy our lives (read: spend on wine).


Cleaning
 – we each have one major area/task in the house that we focus on and ensure is kept to an agreed upon standard (bathroom, kitchen, chooks etc)- this means that we become efficient at doing the related tasks and only need to focus our attention on one main chore, saving lots of time and energy. And when people get over cleaning the bathroom, usually every few months, we switch it around!DSC_0270

 

Meals – we each have a cook night that fits in with our schedules in which we cook a meal for the whole house. With our focus only on cooking one evening, this gives us each lots of time to spend on our other projects, as well as allowing us to have cheap, home-cooked meals every night (and often leftovers for lunches the next day). It also means we often    have big ‘family’ meals during the week which is a great time to debrief about our days, catch up on news and bounce around ideas.

2013-12-20 17.23.38Groceries – everything in the house cupboards and fridge is communal, except things that are specifically bought by person for themselves beyond the food kitty (and they have their name on it!). We each spend $40 per week on food for the house, and add things to Wunderlist as we need them. I highly recommend Wunderlist for keeping track things like groceries, especially amongst a busy group of people. We also have five chooks which provide us with eggs every morning and an expanding garden that provides herbs and greens. Another great thing about a big house is that things can be easily bought in bulk, significantly reducing the per unit cost of food items, making it very cheap to eat.

 

Tidying – everyone is responsible for their own stuff. That means cleaning your own dishes and laundry, as well as keeping communal areas junk-free. Fostering open communication (and choosing housemates willing to take on board a little healthy constructive criticism) is key to ensuring this works well!

 

Communication is the key to all of this. Fostering open and supportive communication based on common interests (happy home, healthy pockets) is critical to making sure all of these work, and no one feels like that are carrying all the load in terms of money and time. You need to be upfront with housemates right from the beginning about what is and isn’t acceptable and discuss that fact that you are keen to address issues before they become unhealthy and costly problems.

2015-07-12 12.19.48