Planning For Retirement In Your Twenties Is Never Too Early

When you are in your twenties, setting goals such as saving for retirement is really unfathomable to most. The better goal would be to think that you are saving to give yourself choices and freedom in life. 

To enable you to give the finger to any ass* who really disrespects you along the way and not have to faint financially from the repercussions. To be able to travel anywhere at a whim without having to work out a savings plan or put it on the credit card because you are moneybags.

I received an email a while ago from another blogger and personal finance writer, Marianne Ahlmann. It's probably a copy and paste job to many other blogs, however, I thought the questions were interestingly posed:

Good afternoon, 

How is your Monday going? I'm Marianne with Personal Capital, a company helping people achieve financial success through technology. I came across Smart Money Guide as I was looking into how young adults can take more control of their money and lives. 

Your 20s are typically the perfect time to start planning for retirement, but sometimes life gets in the way. What did you do successfully in your 20s, or if you could go back in time, is there anything you would have done differently to ensure a better financial future sooner in life? In a post on Smart Money Guide, I would love to hear your thoughts on how you built your financial safety net in your 20s--and how young adults can start now if they haven't already. 
Let me know if you'd be interested in sharing! 

Sincerely, 
Marianne Ahlmann Content and Social Media 

Thought it would be worth expanding on the financial questions asked. Personally, I would say it's been an amazing investment journey and there has been lots of lessons and strategies evolving over the years. I had a head start considering my educational background in school was heavily weighted into economics, business, maths and English. At 16, I met a super intelligent guy who was an economist at the Reserve Bank of Australia and he sparked off a life long interest in economics and financial maths.

Upon leaving school, I obtained double degrees in Accounting(B.Accg) and also Applied Finance(B. App Fin). And post University, I finished my CPA. Both Mr SMG and I started saving and investing the moment we left University. We bought into non-performing managed funds. We bought blue chip stocks in the ASX100 which paid dividends twice per year, we bought real estate. We leveraged using the bank's money. We both did that individually until our paths collided and then we combined our assets and the combination of joint finances really took off. 

I'm a pragmatic type of person. Every action has its consequences. If you save and invest from your twenties, of course you will have assets and most likely be a millionaire, probably many times over, by the time you retire. If you are a spendthrift and blow everything you earn, of course you are likely to be a pauper, struggling financially and living some sort of financial nightmare.

Based on my own personal experience, let's cover the things I have learnt and what you can do in your twenties to ensure a better financial future:

* Build multiple sources of passive income streams as early as you can. If you're not working, your money is still working hard for you
* Embrace leverage and good debts, borrow more money to invest in more property and shares
* Don't listen to the naysayers and the doom and gloomers, do your own thing and buy when you can afford
* Diversify across asset classes. The various asset classes usually have alternating cycles so when one, such as the stockmarket is in the doldrum, the other such as real estate is experiencing growth. Many investors will pull their funds out from one class and invest into a different asset class. They don't like dumping their funds into bank deposits and cash accounts to earn 0.01% per annum interest. Gross interest of 5% yields 3.5% after tax on the average 30% tax rate and after head line inflation of 2.5-3.5%, your funds have experienced zero growth and zero capital appreciation. 
* Save as much as you can and buy assets as early as you can, use leveraging and investment/mortgage loans to grow your wealth faster (only as much as you can afford to borrow and commit to)
* Don't buy managed funds unless you wish to have your funds consumed by the investment banks. The entry, management and exit fees will erode your funds.
* Learn about assets, liabilities, investment terminologies and strategies as early in life as possible
* Read lots of investment books, read financial news, learn financial maths about how to calculate returns, ratios, mortgages, how to compare returns
* Keep learning and building on your knowledge every single day. Do not stagnate. Do not let your knowledge erode
* Do not let swindlers and scamsters take your money and run, if it's too good to be true, it is
* No one cares about your money more than you do. Not the financial adviser, the mortgage lender, the banker, the accountant, the lawyer or solicitor, your friends or your family. Lend only what you can afford to write off and don't expect to be repaid what you have loaned out.
* Embrace technology and use it for investing, for learning, for managing your portfolio.
* Don't overstay at any particular company
* Watch out for fees and charges. As Jack Bogle, the Father of Index Funds has been quoted, the "miracle of compounding returns is overwhelmed by the tyranny of compounding costs"
* Travel slightly more because now commitments are so intense that it's almost impossible to get away (have travelled a couple of times to Cananda, US, Japan, Hong Kong, Singapore, London, France, Germany, Italy, New Zealand but wish I could have travelled a bit more, but can't complain)

In 2013, I wrote a post about pro-property enthusiasts posting about regrets and what they would have done ten years ago with what they know now. Here is part of the post below. If you(or we) had bought as much property as possible, we would all have been several more millions better off and closer to financial freedom.

The real estate boom in Sydney from 2013 to now 2015, has been incredible. I wrote in 2013 that our house would have costed $100k more back then, today, our house would cost about $500k-$700k more to buy. And that's just two years. Imagine trying to save up $250k to $350k after tax per year. Here is the extract from my post two years ago which I obtained from Somersoft forumites:

*  "buy something, for goodness sake. Get into real estate. Be careful- but not so careful as not to buy...If someone was going to buy another property, I would be suggesting, as Rolf de Roos does, to at least aim to look at 100 properties.I'm not sure about his other figures- but, at least, if you look aim at looking at 100 properties, you'll start to get at some ideas of good vs bad value"

*  "Get a real education, a financial education. Read as many books on financial topics as you can...Your borrowing capacity is not a problem (if you know the rights things and speak to the right people)"

* "Educate myself on all things financial, Property, Tax, shares etc...Invest as early as possible as time is the essence of good investing...Do not be suckered into public or media hype or fear...Device a plan and stick to it...Keep all things in perspective...By(sic: buy) all the property you can! "now"!!!!!!!!"

* "If I was to give myself advice for 10 years ago it would probably be to put into practice the principles from the book The Richest Man in Babylon."

* "FINANCIALLY – Educate yourself. Don’t follow the crowd. Take a chance now and then. MORALLY – Stubbornly believe in your abilities and be good to those less fortunate.For one thing I would have hugged and kissed my mum a lot more often and not taken her for granted."

* "1. First, last, foremost: Educate yourself financially, friend. Read some good books, it's not really difficult, get to know the basics and understand how this money stuff works!! Learn, learn, learn so you can work smarter, not harder. 2. Spend less. Those doodads add up. Did you know you can afford a property on what you spend on lunches/coffees/etc? 3. Use 1 and 2 to buy effective investments. Buy property now. Don't wait to 'save up the deposit', don't wait 'to pay off your mortgage'. Use the house equity & buy now. Balance negative geared with positive cashflow."

* " I would have got into property and not share traded or bought into managed funds like I did then!! That is for sure!" [Must have been burnt by the stock market]
* "What I would do differently if I could go back would be to purchase a property as close to the beach or city as possible, take interest only loans for 90% of purchase price (and pay the LMI), wait 6 - 12 months to see the effect on my cashflow and use surplus savings from my income to fund the next purchase....quite a conservative strategy but one that would have me sitting on at least 5 properties that as a group would be putting cash in my pocket and worth substantially more than my purchase costs. I would have my current accountant preparing my tax returns and give me advice on how to structure investments."

* "I wish I had read the book E-Myth by Michael Gerber back then. The best book for business owners I have read... I invest in what I know, which is real estate and I always have a plan "B", my what if it doesn't work plan. I have written goals, a business plan and I let those around me know what they are and try to keep them focused on them also. Being part of a great network is a very big help, I now know the advantage of franchises although I had never before been an advocate."

* "*make sure you are armed with information     *develop your strategy and then make a move     *don't blindly follow the advise of someone else     *don't be complacent, know what's going on at all times     *use the rental income to your advantage     *do everything possible to avoid selling."

* " 1. Invest whilst you are living at home with your parents. It would seem to be the easiest way      to gain a good foothold for achieving financial independence.    2. Buy property that you can rent out, not land. I bought land at the age of 21, with the              intent of building my future home on it in X years time. Would have been much smarter to buy      a rental property, especially one I could live in later, perhaps.    3. Obtain financial education - not from your parents because more likely than not their              "advice" will be ultra-conservative and keep you in the rat race (but you still gotta love your          parents).    4. Get into the habit of saving a'la Richest Man in Babylon. Material possessions are not             everything.    5. Balance your life and your work, and value your health."

* "Don't waste your time on jealousy. Sometimes you're ahead, sometimes you're behind. The race is long and, in the end, it's only with yourself...Get to know your parents. You never know when they'll be gone for good. Be nice to your siblings. They're your best link to your past and the people most likely to stick with you in the future. Understand that friends come and go, but with a precious few you should hold on. Work hard to bridge the gaps in geography and lifestyle, because the older you get, the more you need the people who knew you when you were young."

* "Keep going with your plan. It works out. Don't get scared as the numbers get bigger." 

 Anyway, I do love reading the financial and personal advice that the forumites gave and it is true, your family and friends are very precious. Appreciate and love them and let them know. Life is just too brief.

And that concludes this mammoth post. I sincerely hope that this post will help and contribute to someone's life in a beneficial way. I am always forever grateful to the generous community out there posting up and sharing freeware, shareware, widgets, apps and knowledge. I am hoping to do my part too with beneficial contributions.

Robert Kiyosaki: Who Took My Money?

Book review on Robert Kiyosaki: Who Took My Money?

Robert Kiyosaki's book(co-authored with Sharon L. Lechter), 'Who Took My Money?' on "Why slow investors lose and fast money wins" is an interesting read. If you've never heard of Kiyosaki, then you've been living under a rock. He's been on the New York Times Bestseller list multiple times with multiple books.

Although 'Rich Dad Poor Dad' is his most famous book, it's not a favourite of mine. His later books are much better because he becomes a more experienced investor with a better advisory team when he has more money to invest and it's evident in the later books compared to his earlier work. Kiyosaki's book can be annoying to read sometimes because he keeps plugging his own products and boardgame, almost in every single chapter :/


Are Mutual Funds and Managed Funds evil?

Kiyosaki thoroughly dislikes Mutual Funds (for Australian readers, Mutual Funds=Managed Funds, 401(k)=Retirement Funds). He's always denouncing them and telling readers to steer clear of them. I'm not a huge fan of managed funds either. Some are decent (like the index funds with low fees) but the majority has high fees, does not outperform the index (eg All Ords, ASX200) and will charge you fees even if they are losing money hands over fist.

I'm going to highlight the bits that I found interesting or may be of interest to anyone else. 'Who Took My Money'(WTMM) was first published in May 2004, prior to the GFC and mainly reflects on the dotcom sharemarket bust. Ironically, his book is timelessly relevant in light of the GFC crisis that rocked the world in 2008.

 WTMM is structured into two sections: "What Should I Invest In?" and "Ask An Investor".

What Should You Invest In?
 
Kiyosaki doesn't like diversification in simply the stock market. He recommends 'integrating' and using the powers of the following 'financial forces':

1. Business
2. Real estate
3. Paper assets (shares/stocks)
4. Your banker's money (via leveraging/gearing/mortgage loans/margin loans)
5. Tax laws (via depreciation and the ability to deduct expenses prior to paying tax on profits)
6. Corporate laws (via business entity, copyrights, patents etc)

Whereby, the more you can mix and match those particular 'forces', the more you can accelerate your wealth and returns to create 'financial synergy'.

He refers to life as 'The Game of Money' because we work for approximately 40 years. When you're 25-35yo, you're in the first quarter, 35-45 is second quarter, 45-55 is third quarter and 55-65 is the fourth quarter. After 65, you're in overtime and if you're disabled or have some health impediment, then you're 'out of time'.

Kiyosaki refers to a cash flow quadrant whereby he recommends moving from the 'employee' and 'self employed' side to the 'business owner' and 'investor' side of the quadrants will accelerate your returns. See below:

Employees and self employed individuals will only earn income whilst their personal labour is involved. If you don't work, you don't earn. Simple. On the business owner and investor side, if you don't work, your business and your investments will still generate passive income for you.

The reason why B-I are will help you get richer faster is due to reasons such as utilising OPM(other people's money), choice of operating entity, ability to depreciate your assets against your returns (he refers to depreciation as 'phantom income') and the ability to leverage. Just as the financial institutions use leveraging(on bank deposits) to magnify their returns, you can also use leveraging(from bank/mortgage loans) to magnify your own returns. Savers and depositors earn peanuts on their savings.

The most important aspect of the B-I side which I would also like to emphasise is that you can deduct your expenses against your income prior to paying tax as a business owner and investor. Unfortunately for employees, usually you pay tax first prior to being able to deduct your expenses.

Kiyosaki rather dislikes answering the question, "I have $10k, what should I invest in?". It's a difficult and complex question to answer. Firstly, it depends on your own scenario, how old you are, where you're at in life, what existing debts you have already and where you're at in terms of financial knowledge and experience. If you don't know what to do with your $10k, then the best thing you should do is stash it in a high interest savings account. Go read about investing and then you will have a better idea of what to do with it. Otherwise, you will eventually get fleeced.

He writes that simply putting all your savings into a 'mutual fund/managed fund', dollar cost averaging by monthly contributions, crossing your fingers and praying that the stock market goes up is akin to gambling. There are no guarantees that you won't lose money, there are no insurance company that will insure your stock portfolio against losses. You can insure your stock portfolio but you will need to employ put and call options which are techniques that most average and newbie investors are unable to employ.

He contrasts this against buying investment properties. Insurance companies will insure investment properties because it's a more stable investment but they won't insure your stock portfolio. Using these two examples, he illustrates that the stock market IS riskier than the property market.

"One of the reasons so many investors lose so much money is because they pay $10 a month into a fund for forty years and do not know if it will be there forty years from now."

Maybe Kiyosaki was on the foreclosure ball already back in 2004 when he wrote that, "Today in Phoenix, Arizona, the fastest growing major market in America, foreclosures are up. Many people are losing their homes. Investors are bailing out of properites that they paid too much for."

Unfortunately he was wrong thus far on the Australian property market, "In Australia, interest rates are on the rise again, which will mean the greater fools of the property market will be led to slaughter." Property prices have risen significantly since 2004.

Building pipelines

I once read a quote from Napoleon about investing. He said that investing is like planting trees(or was it fruit trees?). It takes many years, but after several decades, you will have a forest to protect and feed you. I like thinking about investing as planting young fruit trees. The more fruit trees planted and the earlier you plant them, the more fruit you will get as they mature over the years and you will beable to enjoy a whole forest and orchard of trees.

Kiyosaki compares investing to building pipelines. Over the years, you wish to expand the diameter of your pipelines. The goal is to "simply build the pipelines and continuously expand the diameter of the pipe" which is a metafore for increasing the amount of passive income and return that flows from your investment. When you first start, it's a drip and over time as you expand your business and or investments, it becomes a heavier flow of passive income.

This post is becoming insanely long so I'll just quote directly from the book without any of my own personal reflections:

* "one of the most important assets an investor needs to manage is their flow of information. One of the reasons many millions of investors lost trillions of dollars is because they received financial information that was of poor quality, late, often biased, and sometimes dishonest."

* "Waiting for the long term...millions of investors, even while losing a lot of money in the stock market, are still waiting for the market and the price of their shares to come back up. That is a waste of time. Although the market will someday be back, the market that they lost their money in is gone...instead of investing for the long term, they are waiting for the long term..."

* "The professional investor follows the following formula: 
1. Invest money into an asset
2. Get the original investment money back
3. But keep control of the original asset
4. Move the money into a new asset
5. Get the investment money back
6. Repeat the process ...this process is called the velocity of money...most investors do not realise they too can expand their own money supply and thereby expand their earning power"

* "Consider control and how it differs among the different type of asset classes...
Owning your own business - You are in control
Owning real estate - You are in control
401(k)s /retirement funds - Who is in control?
Mutual funds/managed funds - Who is in control?
Equities/stocks - Who is in control? 
... The individual companies have presidents and board of directors who have control over the operation of the underlying business...professional investors want CONTROL over their assets and their cash flow." The ability to control means you can determine how to reduce expenses, how to increase income,  when to pay tax (ie when to sell and trigger CGT tax) and your leveraging ability.

* "Many people just turn their money over to total strangers and wonder why they get such poor returns. Or many people seem to think that it should be easy to find a great investment...The fact is, it's easy to find bad investments. The world is filled with people offering you bad investments to invest in. If you want your money to work hard for you, you cannot afford to be lazy."

* "Four green houses...one red hotel...the purpose of business is to make life simpler, not harder. The businesses that make life the easiest are the businesses that make the most money." He employs examples such as cars, phones, supermarket, electric companies etc

* "You should learn to take things that are difficult and make them simple. If you will focus on that, making life easier for people, you will become a very rich person.  The more people you help in making life easier, the richer you will become."

* "The power of power investing...it is investing using all three asset classes(business, real estate and paper assets), reinvesting cash flow, leveraged with OPM and accelerated by tax incentives...power investing requires that the investor invest in two, and preferably three, asset classes."

* "...why then do so many more people invest in paper assets and give up so much control? ...the answer...found in the word easy. For millions of people, it is easier to turn over control of their money than to learn how to drive their money. That is why millions of investors have their portfolios filled with mutual funds without any idea of who is driving the fund..."

* Kiyosaki likes paper assets primarily due to their liquidity rather than their long term value. I agree absolutely.

* An employee's cash flow pattern: EARN-->PAY TAX-->THEN SPEND
* A business owner or investor cash flow pattern: EARN-->SPEND--THEN PAY TAX

* "...the five considerations for each investment and how the investment fits into your overall investing strategy:
1. Earn/create- how will it generate cash flow for you?
2. Manage- how will you manage this investment?
3. Leverage- how much leverage will the investment provide, or can you get?
4. Protect- how should you hold the investment, maximise its profitability and protect it from potential creditors?
5. Exit- how will you get your original investment money back?"

That last quote from the book is imo, one of the MOST important part of the investing process. Answering those five points prior to investing will mean you've looked at all the aspects of the cash flow, the potential benefits, protecting your asset and finally, being able to extract your capital so that you can invest in additional assets.

Investing for cash flow is a VERY important concept. If you only invest for capital gains and employ negative gearing as your dominant investment strategy, eventually you will hit a debt servicing capacity wall and be unable to service further investment leveraging due to poor cash flow. 

It's been a long time since I've written a book review and now I remember why I don't post book reviews often lol. PHEW!!  It has been over two years since I've published material regarding personal finance books. The last one I wrote two years ago, 'Top 10 Books on Wealth' is STILL relevant because they're classic books. You should read that post if you like reading personal financial management books.

Financial Samurai's Financial Freedom Fund

What would you do if you were free to do whatever you wanted every single day for the rest of your life and working really was a choice? Would you travel? Do more volunteer work? Keep working and not change anything? Do you have a Financial Freedom Fund?

Warning that this is a super long post in response and reflection to the Financial Samurai's super long post about his passive income allocation.

The Financial Freedom Fund is commonly used to refer to savings and assets that have grown as such that the returns (income) from them are self sustaining and you can survive on the passive income without having to work. That is, you can retire and become a self funded retiree if you wish to. The premises underlying a Freedom Fund is building passive, multiple income streams to fund your 'retirement' and 'freedom'.

The Financial Samurai and His Freedom Fund



The Financial Samurai (FS) Sam,  has a very interesting post about his Freedom Fund, 'Achieving Financial Freedom One Slice At A Time'. His investment methodology is logical and methodical which reasonates with me. More importantly, when it relates to investment or financial advice, I like reading material from authors and bloggers who practice what they preach.

The FS recently posted about his Freedom Fund and retirement and it's a VERY long article chocked full of numbers if you like that sort of stuff. From the personal details he's divulged in his posts, he's probably in his late 30s to early 40s, so anyone in their 20s, 30s or 40s should easily relate. I like his investment style and the proportions of his diversification across the asset classes (CDs/Stocks/Property/RE funds etc).

My thoughts are that he has a balanced(agressive and defensive) investment portfolio/Freedom Fund which is what anyone in their 20s/30s/40s should be looking at. Folks in their 50s/60s and beyond need more defensive and less volatile assets as they get older.

My own investments are structured similarly to how FS has structured his, albeit I have a LOT less in my funds than he has lol. From reading FS blog for about 2 or 3 years, he probably has $3million plus in assets and capital. He only provided his monthly passive income- I'll work backwards to arrive at his approximate capitalisation amount:

1.CD Interest Income $2800/month, 33600pa and at an average return of 4% (see his blog)= $840k capital
2.Dividend Income $1200/month, 14400pa and at an average yield of 5% (that's an avg yield for me on the pessimistic side since he didn't provide a yield)= $288k capital
3.Rental Property Income $2500/month= yield not mentioned so can't work out the capital on that
4.Private Equity Venture = $100k capital (he mentions 6 figures so that's on the pessimistic end)
5.Real Estate Fund = $110k capital (factoring in $50k returning 120%)

Total Capital $1,338,000

PLUS
San Francisco principal place of residence
Investment Property
401K
Blogging income/savings from FS Blog and Yakezie

That's pretty impressive, very well diversified and is a well balanced portfolio from the extent that he has divulged and broken down for the public to see. A wise man indeed.
How Much Do You Need In Your Freedom Fund?

How much you need in your Freedom Fund = Retirement Fund needs. It's a topic I haven't really covered comprehensively because retirement is decades and decades away, plus my own retirement fund returns SUCK majorly and I can't wait to one day run my own SMSF/retirement funds. Need $200k plus in there for sufficient critical mass to justify the fees of running an SMSF.

There are heaps of calculators on the net that will crunch those numbers for you. I'm not going to do it because there are way too many variables involved, tons of rule-of-thumbs theory and for me not to mislead you, I'd have to write a book. Roughly, you'll need to think about:

*What lifestyle you like (Eg: Comfortable, dining out, some holidays per year)

*How much will it cost to fund that lifestyle (Eg: $1000 per week)

*What amount of capital or savings you'll need to save up and invest to generate that income to fund that lifestyle. (Eg: To fund the lifestyle examples above, if $1000 per week is generated from 5%pa bank interest, you'll need to save $1,040,000**)

The funds saved is commonly referred to as the 'Freedom Fund' in the blogosphere. It's freedom because it allows you to pursue your hobbies and interests and not be a slave to work. The essense of a Freedom Fund that is fully funded is that you don't have to work at all. You could bum around for the rest of your life doing nothing if you wish to because the passive income from your Freedom Fund sufficiently supports your lifestyle.

Many of us enjoy working but there are no guarantees that 35 years later we'll be keen on what we do now. Personally, I would never retire early if I had a choice- I love working and it ensures the mind is active and doesn't degenerate. Secondly- imagine being the only retired one in your friendship circle- who else would you hang out with if they're all busy working?

Recently, plenty of retirees find out that a) they haven't saved enough, b) a financial crisis can cause their portfolio to plummet and dividend income to be cut, c) unexpected costs and health problems can quickly erode income and capital, d) trying to find work when you're a lot older can be very difficult so while you're younger and can work- work as much as you can. Some were caught out by REITs that were 'frozen' and unable to pay out investors who wanted to exit the REIT because they had liquidity problems.

Anyway- this article isn't focused on retirees but the younger crowd who wishes to escape the daily grind, or build capital and investments that will allow them to create choices in their life. I have no-where near the amount that the $3million that Sam the Financial Samurai has.  It will take me years to build $78,000-$117,600pa in passive income like the Samurai. You gotta start somewhere, right?!

That's it folks and have a great weekend yo!

______________________________________

** This is using flat interest with plenty of assumptions built in to avoid boring the general public to death. For those interested:

_ You need to factor in inflation (that the $1000 used in my example above, buys less and less every single year into the future)
_ 5% interest return can be too high (In the US the interest is 1% and even less. There is no guarantees that you can even earn 5% on your funds)
_ 5% return can be too modest (If you invest outside the bank into property or shares, you have the potential to earn significantly more than 5% pa)
_ Compounding is ignored (You can factor that into your returns if you're mathematically inclined)
_ Taxation is ignored (You can factor that into your returns if you're mathematically inclined)

Property Renovation and Weddings

When the weekends ain't enough, the weeknights are used. I was out on Wednesday, Friday, Saturday and Sunday.

Property Is Not Really A Passive Investment

Rental investment property and rental income in reality is a semi-passive form of income. Theoretically it is considered passive but you could find yourself painting, gardening and scooping up dog crap like me and that doesn't convey an image of passiveness does it? Or tenants asking you about this or that which has broken and needs repairing.

Last week, my folks wrapped up paperwork on an investment property that they bought. The house requires some cosmetic renovations so on Saturday, my friend(W) and family did some painting. First the undercoat of paint. Holes and dents were puttied over. This weekend should be the final coat of paint. The garden will require some work and redesigning. I've been thinking about the garden. It's currently a mess with overgrown weeds and the worst plant combinations. I would have thought it'd be more logical to plan the garden before landscaping and planting anything. But alas, they planted everything in an adhoc manner. This is how it currently looks:

I plan to do some weeding, fix up the garden bed and clearly separate the garden from the lawn. Painting and gardening is quite fun and enjoyable. I love transformations. It's not the first time I've painted so I'm slowly improving without dripping too much all over the place and applying a more consistent layer. The paint rollers are like my new best friends! The previous owners were rather unhygienic. There must've been almost one kilo(two pounds) of dog crap on the lawn.

Didn't they realise that all the dust, dog crap and fur smothering the place detracted from getting the best sale price? If that was my house, I'd have given it a good scrub, cleaned up the lawn and wiped up every dusty surfaces to maximise the sale price and entice would-be buyers to fight for the property.

A clean, well maintained property with beautiful interiors and landscaped lawns will always trump something dirty and untidy. It will lure a more affluent class of tenants too. There's a lot of work to do on the place before it can be rented out so hopefully I'll remember to document before and after shots of the renovation and redesign.

The Wedding

Two friends got married on Sunday at St Thomas' Anglican Church at North Sydney. The church was originally built in 1846 but since then replaced by a larger design which opened in 1884. It's a grand, historic church with huge organs and a rich, red carpet leading up to the altar.

The reception was held at WatersEdge situated on Pier one. The view is breathtaking with unobstructed views towards Luna Park, Walsh Bay, the Harbour Bridge and the Opera House. The alternate entrees and mains were average and nothing special. Fortuately for WatersEdge, they have a beautiful location and specialise in functions rather than in the business of restauranting.

Some scenic shots around the venue:

On the left: These aren't books. They are super cute boxes for inserting wedding cards and 'hong bao' (red moneybags) which are traditional in a lot of Asian weddings. Money as a gift form has been gaining popularity ever since couples started cohabitating together prior to marriage. By the time they actually marry, their abode is jam packed with household goods and items already, so the traditional gift registry is heading down the path of the dinosaurs.

How much to give? The general guildline absolute minimum is $100 and that's bordering on stingy believe it or not. Due to inflation, wedding gifts of hong baos should be over $100. At least $150 as a starting point per person if you're not struggling financially.



Our table was a corner one with sweeping views of Sydney Harbour and the Harbour Bridge. I should have entered prior to guests entering so that I could get uninterrupted and unmussed up shots of the place.
The wedding cake was cute with the dress decoration on top, custom made to resemble the bride's actual wedding dress.

The Sydney Harbour Bridge and the Opera House looks nondescript in the daytime, but when night falls, they obtain their beautiful glow. It's as if the daylight is harsh on their features while the night light softens their wrinkles:

 

Hope you've enjoyed these photos and the renovation recaps.

HECS HELP Student Loan: Lump sum payment

Goodbye $3,500 .... I made a lump sum payment against my student loan last Friday. I was reluctant to part with it because it meant that the $3500 won't be sitting in my account accruing interest income for me at $17.06 per month. 

So you're thinking "Bah $17.06, that's nothing!" Let me show you the ramifications of that $17.06/month passive interest income that has been forgone.

Although $17.06/month pre-tax isn't truly significant, the after tax amount could have bought me each month(until I reach 65 yo)**:

* Two sandwiches at the sandwich bar (840 sandwiches) OR
* 28 super soft, freshly baked bread rolls that I love munching on (11,760 bread rolls) OR
* 3 kilos of apples (1,260 kg of apples) OR
* 4 kilos of oranges (1,680kg of oranges) OR
* 2 litres of vanilla ice cream (that's 840 litres of ice cream)  OR
* 4 vanilla slices (that's 1,680 vanilla slices!)

It could have been a passive income of $17.06/month, EVERY month, EVERY year for the rest of my life. Is that starting to sound more significant yet?

$17.06/month in interest income is:
$204.72/year and
$23,389 in total across the next 35-40 years until retirement age**

So maybe I've convinced you to agree that missing out on $23,389 of forgone, sacrificed income does sound significant. It's more significant when you realise that it would have been $23,389 for doing zilch, absolutely nothing at all. All I had to do was let it accumulate and compound every single year until I reach 65yo (if I survive to that age).

You can acquire those benefits too

By saving $17.06 more each month OR by spending $17.06 less each month. All those actions will translate roughly into $23,389 when you're 65yo, presuming you're in your twenties to early thirties.

So why did I make a lump sum payment?

Unfortunately the Government cut the discount rate for upfront lump sum payments of $500 and more from 10% down to only 5%. HECS/HELP loan indexation occurs on 1st of June every year. So by paying $3500, my loan will decrease by $3,850 and also I don't get indexed on $3,850 potentially saving me $115.50 (assuming the inflation indexation rate is 3%). That means a total of $3,965.50 off my loan balance from paying just $3,500.

**Assumptions:

* Those are pre-tax numbers and will obviously be less with tax
* Assuming I save that $17.06 every month for the next 35-40 years
* That $1 today isn't more valuable than $1 in the future (when $1 today is worth more than a future $1 due to inflation)
* That the compounding interest rate is 5.85% return per annum (what my savings are currently earning)
* That you've got 35-40 years before you turn 65yo
* Assuming prices of apples, ice cream and vanilla slices are the same in 35-40 years (which it won't be because there's always going to be inflation)

Further reading:
1. Perform monthly or fortnightly financial health checks for optimum results
2. Understanding loans and their features

Borrowing $400,000 from the bank

Whoa, I can borrow more than $400,000 

My bank ran some preliminary numbers and said that they can probably arrange a pre-approval for me to borrow $400,000. And that's on top of my current loan commitment. The average Australian loan is about $360,000. If I were to fully leverage myself, then my aggregate investment loan balance would vastly exceed the average loan.

Would you borrow that much?

If your bank offered you an additional loan of $400,000, would you accept their offer?

I'd be crazy to borrow the maximum amount and gear myself to that extent. It's a bad move to over-leverage and also a bad move to under-leverage.

Why is it bad to be under-leveraged? Currently, I'm under-leveraged which means that I have the potential to buy more investment assets and service a greater loan. This can potentially translate to greater passive income and capital gains but I'm not taking advantage of that because I'm under-leveraged. Next year I plan to buy another investment so that should sort out the under-leveraging situation. Although I wouldn't borrow the maximum because that could topple like a house of cards.

Why is over-leveraging risky? No-one should be borrowing up to their maximum servicing capacity(your ability to repay loans) because it doesn't leave any rooms for errors, disruption to the income stream (job loss or fluctuations in business revenue) and it'll probably be rather stressful when you're walking on a financial tight rope. If you subject yourself to high risks, then you're subjecting yourself to the risk of having to liquidate your investments (shares or property) at an inopportune time, therefore, realising your losses and not having the ability to ride out asset price fluctuations.

How do you work out repayments?

I use my favourite site yourmortgage.com.au for their advanced repayment calculator. Although I've compiled my own spreadsheet with inbuilt formulas so no longer use this site but I recommend this one. Why? They have a fantastic loan repayment calculator. It's accurate and doesn't do shabby rounding ups and downs that ultimately give users inaccurate numbers like some of the other online calculators that I've checked out.

A loan of $400,000 at 8% for a loan term of 30 years means repayments of:

$2935.06/month OR
$1354.06/fortnight OR
$676.91/week

Of course, if you are buying an investment then you'll be earning investment income so that could contribute towards the repayment. If you're in Australia, then you also get a tax deduction for interest paid and a raft of other tax deductions associated with the maintenance of your investment. After all these deductions, the cost that's coming out of your own pocket is significantly less.

What if I want to instead, maximise my borrowings?

If I really wanted to borrow the maximum, then I would be refinancing my current investments down to a loan valuation ratio(LVR) of 20% so that I could borrow up to 80%.

By doing this, then for every $1 that I have, I can borrow $4. This is how I can fully gear myself and risk over-leveraging:

• If I have $100k then I can borrow $400k for a $500k investment.
• If I have $200k then I can borrow $800k for a $1 million investment.
• If I have $300k then I can borrow $1.2 million for a $1.5 million investment

Generally, you can maximise your borrowings and fully gear yourself without paying lenders mortgage insurance (LMI) if you have at least 20% to deposit.

Further reading:

1. 15 Tips On Paying Off Your Mortgage Faster
2. Understanding Loans and Their Features
3. Paying off your mortgage faster - The scenarios

Update on progress bars and income

Interest income

My interest income is growing quite nicely. In March, there was a bit of a stumble in the trend. There have been so many bills to pay that no doubt, there won't be a growth in savings for some time and thus, no growth in interest income. Boo.

Dividend income

All the stocks in my share portfolio pay dividends. Interim and final dividend, which means twice a year. The stocks that I'm holding (WOW, NAB, BPT, IPL) haven't increased their dividends but then again, the trading environment (domestically and globally) has been challenging. 

There are a few industries that I would NEVER contemplate buying into: Airlines, clothing or white goods retailers, agricultural stocks(wheat, wool, grains, rice, sugar etc), aquacultural stocks, viticultural stocks, construction/building stocks. Stocks that are subjected to the vagaries of the discretionary consumer spending, weather and or government regulations.

Rental income

This source is semi-passive income. I'm on the committee as treasurer and there's always something to follow up on, quotes to flick through, questions to be answered and meetings to attend. This income source is relatively stable.

Update on progress bars

Progress back in January compared to 01/04/11:

1) (good) Fundraising was @ 48%, now 62% of goal raised

2) (stable) HECS/HELP student loans @ 57% paid off, unchanged

3) (stable) Savings for the Euro trip @ 0% saved, unchanged

4) (good) IP deposit @ 29%, now 35% saved

Summary for March:

1) (good) Savings account were up since my January recap

2) (good) Interest and dividend incomes(not so much dividends) are growing

3) (bad)   Market value of stock portfolio took a slight hit due to the crisis in    

              Japan

4) (good) Superannuation retirement fund is up, from contributions rather 

              than from fund performance. Don't plan to make a lot of extra   

              contributions until I can operate my own SMSF (Self Managed Super 

              Fund)

5) (bad)  Expenses up due to both lifestyle and bills

6) (good) Investment loan liability balance is down since the last reckoning

7) (stable)HECS student debt. I'm planning to make a lump sum

               payment in May before the balance is indexed to inflation on 

              01/06/11

8) (good) Net wealth overall is up.

Further reading:

1. Update on progress bars & interest income in January

2. Perform monthly or fortnightly financial health checks

Working multiple side jobs for extra income

It's been a long time now since I worked two jobs simultaneously, or three jobs if I count assisting my parents with their work.

I never had a problem with working two or three jobs, working six or seven days a week. If it had to be done, it had to be done. Afterall, my parents had worked seven days a week for over two decades with their business and never once complained about it. BUT... unlike a lot of personal finance bloggers, I never had any sort of crippling consumer debt to pay off. The extra income allowed me to buy stocks, go on extravagant holidays, buy investment assets and indulge in my various hobbies and interests.

Why are some people working multiple side jobs?

So do you think your life is tough?

On the weekend, while busy shopping, I chatted with a friend's hubby who updated me with the news that he's been working three jobs. A full time Monday to Friday office accounting role, Tuesday and Wednesday night doing restaurant and grocery store work and Sunday doing grocery store work. He's been trying to erode the mortgage and save some extra money for travelling. He's not the only one at that store doing three jobs. There was another guy that told me that he was a banker Monday to Friday, grocery night filler for 5 nights a week and during weekend daylight hours, worked in Dick Smith Electronics retails section.

If I thought they both worked hard, but then there was another guy that told me that he worked 7am to 4pm at a science lab and worked 5pm-10pm at the delicatessen every Monday to Friday and a full 8 hour shift on Sundays.

All three are working on average 70-90 hours a week holding down two or three jobs each. All driven by different factors - trying to pay the mortgage off early, trying to support parents who live overseas or trying to support the wife and two kids. Some people choose to whinge about not having enough income to buy the things they want and do the things they want, while some choose to work hard to earn that little bit extra so that they have the freedom and choice for their future.

A few years ago, when I raised the issue of multiple jobs and working 70-90 hour weeks, a friend of mine replied, "Why work harder? They should all be working smarter." True true, however, working multiple jobs can allow you to build your wealth or erode your debts much faster. If the idea of cutting back on current expenditure or luxuries in life is painful to you, then you could experiment with the option of working a second or third job while maintaining your current lifestyle. As long as you divert that extra income into saving/investing or paying off debt, then you shouldn't have to live so frugally nor feel guilty about it.

Ideas on how you can supplement your income with side jobs:

• Do contracting work on the side within your area of specialty, knowledge, experience or strengths. Examples: a programmer can write websites on the side, I.T consultants can do I.T contracting work on the side, web designers can do design work for weddings, parties, events on the side.
• Have a 'side hustle'. Examples: teaching music/guitar/piano/dancing, dog walking, baby sitting, gardening, mowing lawns, cleaning, blogging, selling items on Ebay/Etsy/Artfire, catering for birthdays, functions and parties if you have culinary skills, house sitting, coaching a sport team, tutoring a variety of subjects. There are plenty of pf blogs out there exploring the many ways in which you can create income on the side.
• Invest in assets to build passive income streams to replace your multiple jobs. This is my favourite option. If you're lazy then this should be your preferred option too. I label this as a side job because it's just as time consuming as a job. It requires a lot of hard work, effort and number crunching to find assets such as positive cash flow properties and good dividend paying stocks. Also to be diligent in ensuring that your funds are earning the highest market interest rates.
• Working in a part time side job. Examples: Retailing with clothes or food, waitressing, at stadiums or sport events. This one doesn't take advantage of your existing skills, knowledge or experience so will probably pay a lot less than contracting in a side job that uses your existing skills. Although it can add variety and allow you to meet other people from different walks of life.

LA Times and their money makeover disaster stories

You can read about the money makeovers at http://www.latimes.com/business/la-fi-money-makeover-furry-20110220,0,849848,full.story

A lot of the money makeover people featured could really do with second or third jobs to catch up and solve their financial problems. Although anyone with a lots of debts need good defense (cut spending) and good offense (increase income). Ever since Boston Gal started featuring these money makeover couples, I've been reading the makeovers.

Money makeovers involves cutting back on lavish expenditure, looking for how to increase income, how to budget, facing up to reality and how the disaster started to gain momentum and how to reverse that disastrous financial slide.

Would I ever consider working multiple jobs again?

Having time off to spend on personal interests and hobbies is a great way to balance life but if reality required me to hold down several jobs simultaneously, I wouldn't complain. The good thing about saving and investing to create passive income is to actually create choices and flexibility in life. At this point in time, if I lost my job, I could survive indefinitely without working.

It may not be surviving in luxury, but the basics would be covered by the passive income stream. That's what my ultimate goal is. To create choices for my future self and create options for pursuing further dreams, whether that be doing my own thing, or going down the philanthropic, volunteering route.

If you're stuck in this apex of life, holding down multiple jobs and wondering if it will ever end, you need to set some time aside to actually analyse your situation, form a budget and start finding out how you can force yourself to save. With those savings, you can learn to invest and build your investment portfolio whether that be from stocks, properties, bonds, CDs, deposits, interest or whatever. Your future self will thank your current self.

As a side note, thanks to those who have subscribed to my blog and those who have returned to read my new posts :) It's always nice to know that there are readers out there who return to read my new posts and that I'm not just writing for myself and for the sake of writing.

Update on progress bars and interest income

Happy New Year to everyone! Although I haven't been very actively blogging due to millions of things in reality demanding my attention. I've got to stop joining up as a committee member too frequently or else I just get bogged down with meetings, minutes and action plans that are very time consuming and doesn't leave me much time.

It's only a few weeks away from Chinese New Year. I always look forward to it because mum always puts up a feast and I try to help her but I tend to start taste testing and munching too much *nom nom nom* to be of much help ;) This is a photo of the feast that she has cooked up last year:



Progress bars have been updated as of 12th January 2011

I've updated my progress bars. You can view the updated progress bars on my blog's right hand side column. Everything has been going along swimmingly. The savings for the IP is progressing slowly due to my bills inundating me over these past two months. My friend wants to go on our Europe trip mid-year so I may have to switch the saving goals and place the holiday as a priority ahead of the IP. I'm not sure I want to spend $12k on a trip anyway. Been there, done that, and it's been a lot of fun but then there are so many other competing things on the list to buy (see my wish list) and also to invest in. Holidays are a lot of fun, but because our holidays are so action packed, they are always so tiring!

Graph of my interest income for graph fanatics

For those of you who love graphs, here's a snapshot graph of my interest income. I like it when good things grow.... well, the interest income isn't significant yet but it's always exciting to see it increase because it means my money is working for me rather that I'm working for it. It's a source of passive income which is what I like.



It has been a very hectic month so far for 2011. In terms of returning from the Christmas and New Years holiday period and going back to work. A bunch of meetings already. I've also had to attend both, a wedding and very sadly a funeral, even though it has been barely two weeks into the New Year. Already experiencing such highs and lows.

Life can be really brief. Live life to the fullest and live each and every day as if they are special. Don't wait for tomorrow or wait for some day in the future because we never know our future and how long that we are on this earth for.

Asking for higher interest rates on my funds

I've been dumping spare funds into my 'high' interest saving account. The funds that I'm saving to buy an investment property have been dumped into the CBA Netbank Saver account. My 6% high interest deal with my bank was going to expire on 30th November this year so it was time for a friendly call to my bank with the usual request:

"Hi, the special high interest rate on my account is about to expire soon. I've just checked your website and you've got a new and higher interest rate on offer. Can you increase the interest rate on my Netbank Saver account to 6.25% as offered on your website?"

The lady on the phone says, "Sure, I can increase the rates on both your accounts for you today."

Score!!

Mind you, the wording on their website is a deterrent to people like myself (click on the image I've attached if you're too lazy). They specify that the higher interest rates are for new account holders only. This is untrue and all the major banks will match your rates to their introductory rates (these are on offer all year round) if you ask so just ignore their wordings and make your request.

If I didn't ask for higher rates, I'd be getting the usual 4.75 %pa just like millions of other depositors. So I'll happily demand the 6.25% pa rate. Considering the interest is paid monthly, the annual effective rate is actually higher than 6.25% pa.

That's an extra 1.5%pa in interest and that's a huge gap. The more funds you have, the more you're missing out on. Why should they pay me 4.75% for my funds only to lend it out at 11% or 24% to someone else for their personal/credit card loans? Gimme some of that profit :p Just some rough numbers for you below, ignoring the fact that the interest is paid monthly so I haven't accounted for the compounding effect. I've just used simple interest as if interest is paid annually:

* $1000, @4.75%pa= $47.50, @6.25%pa= $62.50, an extra $15 interest per year

*$10,000, @4.75%pa= $475, @6.25%pa= $625, an extra $150 interest per year

*$50,000, @4.75%pa= $2,375, @6.25%pa= $3,125, an extra $750 interest per year

*$100,000, @4.75%pa interest=$4,750, @6.25pa interest=$6250, an extra $1,500 per year

I could always stash the funds into some shares for higher returns but I don't want to expose the capital to any volatility. Plus, I don't expect the savings to be sitting in the Netbank Saver account for an eternity. Once there's enough there, I'm going shopping to buy some bricks and mortar.

US Minimum wage of $5.85/hour versus Australia's minimum wage of $15/hour

Have a look at the table above listing the unemployment welfare payments available for the unemployed in Australia. Could this be why there is no incentive for people who are long term unemployed to actually go find work? In America, unemployment welfare expires after 99 weeks or so. In Australia, it gets paid indefinitely.

Assuming you're single and living in Australia, government welfare is around $235 per week. The people earning minimum wage in America needs to work the equivalent of 40 hours per week to even earn the equivalent that the unemployed Aussies earn for sitting on their backside and doing nothing. It's a bit loopy and crazy isn't it?!
It's even crazier when you consider that if married or defacto couple were living together, and they were both unemployed, the Australian social welfare payment would be $424/week. While this may seem generous compared to the income of minimum wage workers in the US, it would be a struggle to survive in Sydney with that amount unless you moved out to the suburbs and away from the CBD inflated living costs.

I've been to the US on holiday and things aren't cheap over there. New York is just as expensive as Sydney. Santa Monica was possibly even more expensive than Sydney. So if the cost of living is roughly the same as in Sydney, how does one survive if they earn $5.85/hour?

Over at GRS (Get Rich Slowly), J.D Roth blogged about minimum wage in the US(Edit 25/07/15 hyperlink removed by request of new site owners) - some of the comments elaborate about how most states have higher minimum wage than the Federal minimum wage. But seriously, it probably feels like living in poverty trying to survive on those wages. The best thing for anyone earning that little, is to try and learn new skills and get a new job. They can also cut their expenses by share housing and living in really dingy, overcrowded share housing, put up with the torture for a year or two until they can save up some type of financial cushion and then move out to something nicer once they've organised their finances somewhat.

Working 40 hours @ $6/hour would mean earning $240/week. That's what the Australian government pays our unemployed folks each week for doing nothing at all. Australia's minimum wage is around $15/hour. I know which country I would want to live in if I was given the raw end of the deal! If I was living in the US earning those minimum wages, I'd beg for that little bit extra for a plane ticket to OZ.

Poverty in Asia

Many Asian nations don't even have minimum wage protection. Or social benefits for those unemployed. Sure everyone defends the poor wages and counteracts the argument by saying that the cost of living is a lot cheaper. But a lower cost of living doesn't mean that they're living comfortably. I was talking to a friend about Cambodia and she was telling me that the average income there is $100 USD per month, which is approximately $3-$4 USD per day. If they can't find work, they starve.

Asking for a pay rise

Wisebread.com had a great article about how to demand and ask for a pay rise or negotiate your pay. There's nothing freakier and more offsettling than asking for a pay rise. Maybe that's why people find it easier to just change employers. If you're working at McDonalds or some fast food place, it's probably a dead end asking for a payrise - probably a better idea if you can get additional qualifications and move out of that industry. Most employers expect justification as to why you're expecting a pay increase. What value have you added to the company and your department. What measures have you exceeded and expect to succeed. Sometimes the best way for the increase is to change to a new firm or to get additional qualifications.

That's the best thing about passive investment income, you never have to justify why you've got a capital gain in your property or stock portfolio, it goes up with demand, you never have to demand an increase in dividends, because as the company earns more, you get an increased share of their dividends. If rent goes up in the area where you have an investment property, you don't even need to justify why your rent will go up, because renters can see that the rental rate for the area has gone up and they won't argue with paying your rent.