Author Topic: Student Advice  (Read 6581 times)

themadman

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Student Advice
« on: April 21, 2015, 08:37:46 PM »
Hi All,

I've just started reading through the blog 2 days ago, and am about 13 articles in. :) As it mostly seems aimed at people with a full time job, with a fairly large income and expense list, I thought it'd be best to get advice from you all on my position. I'm living in Australia, so I have no up-front student debt (all our fees can be taken care of through HECS, which is a no-interest government loan only needing to be repaid when I earn over a certain amount) and I have no outstanding debts/loans of any kind. I'm living away from home, with fairly low expenses and income.

Income
$324/fortnight

Expenses
$120/fortnight = Board
$18/month = Phone
$95/fortnight = Miscellaneous

Savings
$100/fortnight into a 3% interest account


(That income is after tax - that money is government financial support in the form of Youth Allowance)


I don't have a car, and ride my bike to Uni / shops, so I don't have any car expenses at this point (my gf has a car I borrow occasionally and pay for petrol when I do). As I'm living away from home to study, the government sends me an extra $2000 every year for books etc, and I've just negotiated with them to get a $4269 grant. Of that, I'm spending $1000 on an overseas trip with my gf in June.


What I really want to know is what is the best option to do with the remaining $3000 + future grants? At the minute I'm just putting it into a Commonwealth savings account. I've never invested before, and I've only just developed an interest in it after reading a book at my Aunt's place (Rich Dad, Poor Dad). Is it worth investing this $3000, or is there a better option I should be taking advantage of? Also, any other general tips on improving my finances? I could theoretically live of $0/wk because all meals/accommodation are covered in the board, but there's always misc. expenses popping up to take from that. I really just want to make the best use of my savings as it stands.


Thanks for reading this!
« Last Edit: April 21, 2015, 08:49:41 PM by themadman »

Zamboni

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Re: Student Advice
« Reply #1 on: April 21, 2015, 08:47:10 PM »
Keep some cash set aside for emergencies (and only use in case of a true emergency.)  I don't know what the investment options are in Australia, but you should invest the rest in a broad stock market index and plan to just leave it parked there for the next several years.  After all, you don't need it right now and it can earn killer returns for you if you let it compound for a long time.  If you were in the US I'd say to sock as much of it in a Roth IRA as allowed by law. 

themadman

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Re: Student Advice
« Reply #2 on: April 21, 2015, 09:07:12 PM »
Yeah, I have about $400 across 2 savings accounts at the minute which I didn't include in the above list. How much should I really be setting aside for emergencies? I just looked up investment options and noticed that Vanguard has some investment options in Australia. I have no background and done virtually no research though, so I have no idea what I'm doing when it comes to finding a good investment option. If anyone knows any good solid Australian indexes, please let me know! I just don't really know what to look for with an index?

Also, do I have to be worried about any sort of minimum amounts when it comes to investing my money?

acorn

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Re: Student Advice
« Reply #3 on: April 21, 2015, 09:26:59 PM »
Yeah, I have about $400 across 2 savings accounts at the minute which I didn't include in the above list. How much should I really be setting aside for emergencies? I just looked up investment options and noticed that Vanguard has some investment options in Australia. I have no background and done virtually no research though, so I have no idea what I'm doing when it comes to finding a good investment option. If anyone knows any good solid Australian indexes, please let me know! I just don't really know what to look for with an index?

Also, do I have to be worried about any sort of minimum amounts when it comes to investing my money?

Start reading up about investing. Bogleheads has a great guide for beginners. I also like jlcollins' stock series. Although it is US-centric, the underlying principles are the same. Think about your investment plan, asset allocation (equity/bonds, local/international), and construct an investment portfolio. For the emergency fund, it's up to you, but it's common to set aside 3-6 months' expenses.

Like you mentioned Vanguard has funds domiciled in Australia, you can look into those. Main things for an index fund are low expense ratios and diversification, which you'll get with Vanguard. The Australians on the forum can probably answer the Australia-specific questions better.

themadman

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Re: Student Advice
« Reply #4 on: April 21, 2015, 09:35:26 PM »
Thanks for the tips! I was hoping to minimise the amount of research I have to do, but I guess it's inevitable if I want to get anywhere with this...That Bogleheads website looks interesting, so I'll have a read of all that. :) I haven't got any sort of plan established at this point, because I don't really know what kind of income I'll be sitting on when I get out of Uni at the end of next year (Civil/Structural Engineering for me!). Is it still worth making a long-term plan if I don't know where I'll be financially in a few years? Or do you just mean a more short-term plan for what to do over the next 2 years?

Ok, cool. It's handy knowing what to look for! Only problem I've noticed with a lot of the indexes is that they require at least $4000 to get involved? Or am I just looking in the wrong place?

vagon

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Re: Student Advice
« Reply #5 on: April 22, 2015, 04:54:57 PM »
I was hoping to minimise the amount of research I have to do but I guess it's inevitable if I want to get anywhere with this...

There are no shortcuts here, financial literacy is a must. You have started on a journey that isnt that complicated but deserves your attention, there's no shortcut and looking for one will get you ripped off.



Is it still worth making a long-term plan if I don't know where I'll be financially in a few years? Or do you just mean a more short-term plan for what to do over the next 2 years?

Its worth working backwards - starting with the end in mind. Accept you cant predict the future, but don't neglect the planning process. The suggestion here is to figure out your ideal life, focusing on what makes you happy and not XYZ material object. Cost up that life per year and then times it by 25 and 30. these amounts represent the range of assets you'll need to have in the bank to be financially independent. If that number is daunting then you'll probably need to rethink your ideal life and cut out more fat.

themadman

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Re: Student Advice
« Reply #6 on: April 23, 2015, 08:11:44 PM »
Yep, I think you're right! I've got a lot on my plate at the minute in terms of Uni and religious commitments, but I'm finding this blog so fascinating that I don't think I'll really struggle to find the time to research it all. One of my aunt's is also a pretty decent property investor I think as well, so I might talk to her. Her husband is a language teacher at school and he lost his job at the start of the year and they still seem to be doing ok.

I've been thinking about it a bit and I think I'll find it a bit harder than MMM in the sense that I'd like a large family (4-6 kids) and that'll mean starting a family most likely before 30, meaning I'll have to work a bit longer to pay for everything (I'm currently 20 with 2 years of Uni - if I work from 22-35 (14 yrs) @ ~$80k, does that sound feasible on a pretty tight lifestyle? I've always been pretty tight on my living expenses, so I feel I could contribute $40k to savings per yr once married, and much higher than that if I start work before being married. I feel I'd want about $50k per year once I retire (just keeping things conservative - I could probably get away with 40k), which would require about $750k in investments to maintain, yeah? Does all of this sound feasible, or am I dreaming a bit too much? :D

My other question would be - is it feasible to get married while still at Uni or will it be a financial nightmare? I know a fair few people have done it, and my GF is a full time worker as a Physio assistant, but I just really don't know what to expect financially. Any tips for making it work? I still don't know how long till we'll be ready to get married, but I was hoping within the next 2 years...She's 1 year younger than me, and I think she has a little bit of savings stashed away, but nothing serious. She's done a fair bit of travel in the last year or so.

vagon

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Re: Student Advice
« Reply #7 on: April 23, 2015, 10:07:44 PM »
I would recommend figuring it out yourself, that will also be a part of the learning process. Only you can say what expenses you need/want to pay, how far out from town you can live etc etc.

My view is you should not get married while at university. I would highly recommend living together first and also allowing some time to grow as you age through your 20s. People change significantly from the time they study through to when they are more established in the workplace - that isn't a bad thing, but it is reality.

My suggestion would be to hold off on any monetary gifts  to your religious commitments for as long as possible. Help out sure, but focus on where you do not incur costs. It may be hard under social pressure, but be confident in your own knowledge that you'll have plenty of free time to volunteer once you secure you and your family's finances.


Brian5000

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Re: Student Advice
« Reply #8 on: April 24, 2015, 12:31:36 PM »
You are really young so don't stress about it. You have plenty of time and your life goals (# of kids...etc) are likely to change a few times. I'd focus now on doing well at school, enjoying your uni years, landing a good job, and your relationship with money (i.e. not being a wasteful consumerist). From what I know about Australians, you'll be making a ton more money once you graduate which will dwarf your current income.

I don't know how they do things down in Australia but see if you can find a low-cost (Low expense ratio) index fund to dump your extra money in with minimal account fees ($20/yr). $3-$5k should be enough to get started.

themadman

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Re: Student Advice
« Reply #9 on: May 06, 2015, 08:33:29 PM »
Thanks for the advice guys. :) I've ended up putting $2000 into Vanguard's VTS ETF. I've upped the savings to $155/fortnight, so hopefully that extra $100 a month helps. I've allowed myself $60 a month for miscellaneous stuff, which is really as much as I'll need at the minute. So much is a available for free to me that I'm not really worried about the other stuff I'm missing. :)


I've started reading a bit - just finished the Stock Investment for Dummies guide, and I've pre-booked a couple of the ones suggested by MMM to continue the reading. One thing that has confused me a little is all the talk about index funds - I can't for the life of me find any on the ASX? The closest I've been able to find is ETF's that mirror some of the Australian indexes (which you can't directly buy, right? They're there as a guide/benchmark from what I've been able to make out?). Can someone direct me to a decent index fund that I could be putting my money into right now? :)


My other question - as far as asset allocation, I obviously don't really have enough to start diversifying outside a single fund. How much would you start to invest before you worried about diversifying? ie. Now that I have $2000 in a US-centred ETF with low management fees (0.05%), should I start putting some into an Australian index, or into bonds etc? Or should I just keep building in that same fund for a while?


I have loads of questions, so hopefully they aren't too painful to answer. :D How much would you guys use as a baseline for a single investment? I can broker my trades for $20 through Commonwealth's CDIA, so obviously any transactions of under $500 would be kinda silly (is a 4% fee ridiculous?). How much do you typically collect before investing your money? I have another $1000 ready to invest, but I figured I'd wait for another month or two until my savings are closer to $2000 before making a move. Is this a bad idea?


Finally, with this VTS fund, the dividend yield is 1.71% ttm with quarterly returns. Does this mean the actual dividends last year were 1.71*4=7%? Or is that 1.71 divided over each of the quarterly dividends (0.42%/quarter)?

vagon

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Re: Student Advice
« Reply #10 on: May 07, 2015, 06:39:31 PM »
madman, congrats on starting to invest regularly and benefit from dollar cost averaging. You've already identified your problem though:

One thing that has confused me a little is all the talk about index funds - I can't for the life of me find any on the ASX? The closest I've been able to find is ETF's that mirror some of the Australian indexes (which you can't directly buy, right? They're there as a guide/benchmark from what I've been able to make out?). Can someone direct me to a decent index fund that I could be putting my money into right now? :)

You are looking only at listed funds and as a result you will have to pay brokerage. Investing every fortnight will severely hamper your savings as you have gone down this listed, ETF path. I am assuming you will be paying brokerage each time which is an automatic loss of around 12% every time!

If you want to invest that frequently you would be far better off with the non listed funds. The only cheap non listed funds in Australia are from Vanguard:
    https://www.vanguardinvestments.com.au/retail/ret/investments/managed-funds-retail.jsp#fundstab
They will allow you to invest a minimum of $100 via Bpay, but with no brokerage fees.

The alternative is to lower the frequency at which you invest in ETFs and thereby and minimise brokerage costs, although this exposes you to market timings more.

themadman

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Re: Student Advice
« Reply #11 on: May 07, 2015, 07:43:40 PM »
Thanks! :)

Yeah, I figured investing fortnightly was bad. I really just need to figure out how much to use as a minimum in order to make brokerage fees manageable! For my $2000 investment the $20 brokerage fee is 1% right? (20/2000*100=1%) That seems decent, but I don't really know where to draw the line with a minimum...

Thank-you! That's exactly what I was looking for. :) I'm guessing this would be a pretty decent one to start with. The only problem is that I need $5000 minimum to get started and I only have $1000 free to use at this point. :/ That definitely seems like the way to go once I get into it though if that BPay system is available! Should I be concerned about management fees of 0.75%? Compared with the VTS fee of 0.05% and the VAF fee of 0.2%, ETF's seem like a much better option in terms of minimising expenses. Or am I missing something important here?

If I invest my $1000 now with a $20 fee, thats 20/1000*100 = 2% - thats initially a much higher amount, but still much lower in the long run than annual management for the index mentioned. I guess the difference would be in the extra money you're making by immediately investing instead of stockpiling a certain amount, but I'm not really sure how to quantify the benefit of that.

Thanks for the tips though! All my other questions still stand, as well. :)
« Last Edit: May 07, 2015, 07:50:12 PM by themadman »

SU

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Re: Student Advice
« Reply #12 on: May 07, 2015, 09:40:37 PM »
Congratulations on getting started with your investing, and for hitting upon a good place to bring all of your questions.

I suggest also going to the Australian Investor thread on this forum - some of the advice you are getting on this thread may not be correct for your situation. Your HECS debt is not 'taken care of', it's lying in wait for you AND there might be advantages to paying your fees up front if you can, even if it's only for some of your units. Is there still a 25% discount for paying up front? Because that is a better return for your money than anything you will get in the stock market. I suggest you head over to the Australian Investor thread and post the same questions there.

themadman

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Re: Student Advice
« Reply #13 on: May 07, 2015, 10:08:04 PM »
Thanks. :) It was MMM that actually got me interested in looking into it! I'd always just seen stocks as a big gambling scene, not a realistic investment opportunity.

I've actually been reading through that thread, but its not so much a beginners place. I have no real understanding of tax as I'm not paying any and thus it doesn't affect me at this point. I have a few friends doing accounting, so I'll have to talk to them about it at some point. I think most of the advice so far has been pretty helpful. I hadn't really considered that benefit to paying HECS now though! It's currently at a 10% discount but that's changing to nothing from the start of next year. Even with that discount, is it really worth it though? The money I save is worth 5-10% per year every year. If I save it away and pay the bare minimum, by the time I start paying I've saved increased my money by about 15% at least. And the longer it stays the more it grows. With HECS there's no interest on the loan and thus I'd think the benefit of getting onto it is a lot worse? I'll ask my questions straight into that thread as you advised though. :)

The other thing with paying HECS is that it's completely un-retrievable. Once the money is gone its gone. At least with these investments I can reclaim the money at a moments notice (I'm not anticipating needing to, just adding in possible benefits in an emergency).
« Last Edit: May 07, 2015, 10:10:12 PM by themadman »

vagon

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Re: Student Advice
« Reply #14 on: May 07, 2015, 10:17:44 PM »
In terms of which is more worthwhile, you have to look at everything together but my guess is the index fund is a better way to go.

If an ETF involves $20 brokerage every time you trade and you want to trade fortnightly that's $520 a year in fees. The 0.05% you could factor in too but ignore it for now.
With the index fund lets do some very rough  maths and say you'll invest $6000 (2000 originally + 4000 from the 155 fortnightly) well that is $45 a year in fees.

In reality its not that simple though. You'll need to figure out:
  • the cost of the spread (the buy and sell price)
  • the fact you can get some free brokerage from a lot of brokers for signing up
  • the expected market variation compared to how often you invest
  • the interest earned in cash products while you wait to invest
  • etc.

themadman

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Re: Student Advice
« Reply #15 on: May 07, 2015, 10:29:16 PM »
Definitely I agree with you once I hit the $5000 in cash, but that seems at least another year away for me (no job). I don't think it's the best to just leave it sitting around for a whole year (possibly 2) is it? I can get $600 free brokerage for the first 3 months through commsec, but I think I'll avoid signing up for that until the point where I'll actually make use of that kind of discount. Thanks for the list of factors to consider though. :) I'll keep doing some research on it. It just seems a little far away to be a seriously viable option at this point for me. Unless you think just plain old saving in the bank for a few years is the way to go?

vagon

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Re: Student Advice
« Reply #16 on: May 07, 2015, 11:07:14 PM »
Reality is no one can tell the future, so suggesting that the market will return better money than cash is a guess.
There's also psychological factors:
  • Will you be able to keep investing if your ETF/index fund drops 5% over night and the market maker wont give you a spread?
  • Or alternatively if you keep it in cash will you spend it during you holiday? etc.

Someone in your situation should probably leave the ETF where it is. Then find an everyday account with cash back and a high interest saver (ING for example). Put your regular investments into the high interest saver along with the cash back bonus when it comes. You will reach $5000 networth in less than a year (celebrate!). at this point in time sign up to a broker with free brokerage, get the money out of the ETF, combine with your cash and then you can invest in the index fund and continue the savings.

Really you should go through the exercise of modelling in excel or google spreadsheets when it makes sense to invest in an ETF versus an index fund. It will be a good learning experience in how to avoid transaction fees, calculate break-evens and so on.

If you do take the generalised suggestion above don't sweat that you're in cash for a year. A year really is small cookies. By the time you're ready for the index fund (or ETF if you choose) you will have gotten the benefits of disciplined savings, which is half the battle.


Want to take this to the next level?

Its fair to assume you will live past retirement age, so maybe getting the government co-contribution for putting this money in super is worthwhile. To figure this out you'll need to decide on when you plan to retire, how much non-super money you'll need to support yourself between the early retirement and when your super can be accessed. It makes tax sense that if you're confident you can earn a stash big enough to pay for the non-super years, then everything above this amount should be put into super while you're still eligible for the co-contribution.
« Last Edit: May 07, 2015, 11:14:34 PM by vagon »

SU

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Re: Student Advice
« Reply #17 on: May 08, 2015, 01:09:37 AM »
...I hadn't really considered that benefit to paying HECS now though! It's currently at a 10% discount but that's changing to nothing from the start of next year. Even with that discount, is it really worth it though? The money I save is worth 5-10% per year every year. If I save it away and pay the bare minimum, by the time I start paying I've saved increased my money by about 15% at least. And the longer it stays the more it grows. With HECS there's no interest on the loan and thus I'd think the benefit of getting onto it is a lot worse? I'll ask my questions straight into that thread as you advised though. :)

The other thing with paying HECS is that it's completely un-retrievable. Once the money is gone its gone...

I have the same response to some of the Australian investing thread - I'm just recommending it as a place to take your HECS questions as you're going to get more accurate advice from Australian commenters rather than from US commenters. For investing to outperform pre-paying HECS at this stage, you would have to be guaranteed a minimum of 10% return on your investments. I don't know anyone who is getting that as a guaranteed return. I also don't see how you will increase your money by 15% by the time your HECS debt becomes due.

Futhermore, the government is getting less and less generous about HECS - there's talk of increasing interest rates, higher fees, etc. All good reasons to pay it off as quickly as possible. I know it's not glamorous and there's more inherent satisfaction in having a portfolio than no HECS debt, but it's still a debt and it's going to hold back your net wealth accumulation. People call it the cheapest loan you'll ever get, but it's still a loan. As part of your research, talk to some people about the difference in their take home pay after their HECS was paid off - particularly when you're on a starting salary and trying to set up a household somewhere, you will notice those extra dollars.

This is the same advice a columnist in the SMH was giving to a potential investor in your situation but it was a while ago and the archives aren't throwing up anything. Holding some funds in the meantime will give you useful learning opportunities and an understanding of how things work, but if you want to maximise your wealth in the long term then the HECS debt has to go.

vagon

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Re: Student Advice
« Reply #18 on: May 08, 2015, 01:19:54 AM »
SU what he means is paying his hex debt will create a one time 10% return.
Not paying his hex debt will create a compounding return until such time as it is fully paid off (at which stage these amounts will have less of a percentage ramification to his networth,

I see both sides of the argument.

SU

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Re: Student Advice
« Reply #19 on: May 08, 2015, 02:28:29 AM »
SU what he means is paying his hex debt will create a one time 10% return.
Not paying his hex debt will create a compounding return until such time as it is fully paid off (at which stage these amounts will have less of a percentage ramification to his networth,

I see both sides of the argument.

When I say I don't 'get' it, I mean, 'I find it hard to imagine what assumptions you are making to come to the conclusion that giving up a guaranteed 10% discount on a debt this year is a better option than investing in a fund with a 10 year gross return of 8.29%'. 

vagon

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Re: Student Advice
« Reply #20 on: May 10, 2015, 05:19:46 PM »
When I say I don't 'get' it, I mean, 'I find it hard to imagine what assumptions you are making to come to the conclusion that giving up a guaranteed 10% discount on a debt this year is a better option than investing in a fund with a 10 year gross return of 8.29%'. 

Lets assume $4000 is the amount to invest for simplification.
Scenario 1
He puts it all into HECS (and assuming the HECS debt of 4K or above) he gets $400 value. Nothing else happens because his equity is now 0.

Scenario 2
If he puts that in the index fund at 8% compounding in two years he gets around $700 value.

Unless he is going to be earning a lot of money straight out of university, it makes sense to hold off as one amount compounds (the investment) and the other only tracks CPI (the HECS debt).
« Last Edit: May 10, 2015, 05:21:57 PM by vagon »

SU

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Re: Student Advice
« Reply #21 on: May 11, 2015, 12:46:43 AM »
Quote
Commonwealth supported students who are eligible for HECS-HELP and elect to fully pay, or part pay $500 or more of, their student contribution amount upfront to their higher education provider currently receive a discount of 10 per cent. The amount of the discount is paid by the Government to the studentís higher education provider.

People who have a HELP debt and make a voluntary repayment of $500 or more towards that debt currently receive a bonus of 5 per cent. The amount of the bonus is an additional credit against the studentís outstanding HELP debt. It is an amount never recovered by the Government.

There are two discounts available until 1 January 2016. The 10% discount is for paying upfront i.e. for the coming semester, which means that a $1000 fee becomes $900.

So let's say that the course actually costs $900 and if you direct that fee to HECS it becomes $1000. Now you are paying 11% interest the minute you choose to defer payment.

Annual indexation on HECS debts for the last 3 years has been 2.9, 2.0 and 2.6 per cent.

So if you are going to compare paying fees upfront vs deferral, you are looking at 11% interest immediately and compounding at somewhere between 1.9 and 3.9 per cent (https://www.ato.gov.au/Rates/HELP-indexation-rates/) annually.

I agree with you that it depends on what you expect your graduate salary to be. I just think it is worth running the numbers and avoiding a 'HECS is taken care of' mentality. If you think of the 10% discount as an 11% penalty, paying upfront suddenly becomes more attractive.

vagon

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Re: Student Advice
« Reply #22 on: May 11, 2015, 12:55:23 AM »
I just think it is worth running the numbers and avoiding a 'HECS is taken care of' mentality.

Yep I think we're on the same page - run the numbers and create a model then compare the alternatives. Not only will you get a good shot at the right option, but you'll learn from the modelling itself.