Case Study - Budget analysis and best investing strategy (Australia)

[Waterwheel]

Case Study

Background - I was recently introduced to MMM and it's changed the way I approached our finances. I would really appreciate any and all advice.

Life situation
- Me (34F)
- Husband (34M)
- no dependants - not sure if we will have kids, but if we do it will likely only be one kid
- Sydney Australia

Gross Salary/Wages
- Me - family doctor - varies depending on how many patients I see, but average 100-110K (unlikely to increase from this as my work enjoyment will suffer significantly)
- Husband - software engineer - 100K + 20K bonus most years (may slowly increase)
- nil other income

Individual amounts of pre tax deductions
- Husband - super contribution - 9.5%
- me - super contribution - 25k

Nil other ordinary income, rental income etc

Adjusted gross income: $195.5k (max)

Taxes - 32.5% -37% depending on what we earn (threshold 37% tax for over 90k)

After tax income (assuming max income 110K +120K)
- me $65828 (-$4000 for HECS) = $61828
- husband $80923 (-$4000 for HECS) = $76923

Current expenses
Rent: 600/week = $31200/ year
Water is included
Electricity - $240/quarter = $960/year
Internet - $60/month = $720/year
Phone bill - $50/month = $600/ year
Health insurance - $3409.20/year
Medication - $936 (chronic (but benign) condition + contraception)
Car insurance (we pay for one of my in law’s car insurance and registration to help them out). We very rarely use this car, it is kept at their house. Sometimes my brother in law will use it - $2000/year
Food - 100-120 dollars a week = $6240/year (includes washing liquid, shampoo, toothpaste, dishwashing liquid, stuff you can buy at the supermarket). It used to be 200-250 but we recently tried having mainly vegetarian meals which cut the cost. We are both still learning to cook so we haven’t truly optimised this yet
Transport - we both train/bus it to work and social events- 140/ month for work travel = $1680/year
Eating out - variable - maybe 50 dollars a week, depends on where we get invited. We generally only eat out with friends =  $2600/year
Gym membership = 18/week = $936/year (I went from zero exercise to going to classes 3 times a week. I’ve been going for 2.5 months now and plan to keep going until I can build up the momentum to just exercise at home) 
Pool passes - 20 passes for $123 dollars = $319.8 - I just recently learnt how to swim and want to go to the pool once a week to really solidify my lessons so I don’t forget how to do it. I don’t know anybody who owns a pool or lives in an apartment with a pool
Education + fees to maintain registration as a doctor
Set fees: $4000/ years (insurance will increase every year capped at about 9000 dollars - I can go for a cheaper insurance but that company might not be reliable in helping me if I get sued)
Variable fees: $1500
Miscellaneous (can’t think of things in this category but bits and pieces I assume add up) - $2000
- my hobbies are reading and walking- I live a few streets from a library so it’s really easy
- husband likes programming, watching youtube in his free time and cycling
Overseas travel - $10000 (not yet decided where we will go or if we will go at all). We fly economy but flights are expensive because we aren’t flexible enough to take advantage of sales. Our last trip was to Hawaii and we flew during Christmas period and it ended costing us about $10000 for flights, accomodation, food, activities etc. However, a few years ago

Total per annum: $69101

Assets - no car or house/apartment
Currently 220k saved in a bank account (originally was for a home deposit but now we have decided to rent for the near future)

Liabilities- HECS debt (40K for me and 90k for him) - we are just slowly paying it off

Specific questions

We are both currently really happy with our jobs so we are aiming for financial independence rather than retiring early. If we reached financial independence we might go part time rather than full time but we wouldn’t quit work. I just want to give ourselves the option of retiring early if circumstances change or we both start hating our jobs. I have the following specific questions

1. I’ve realised that I should do something with the 220K in the bank. I plan to put it into ETFs. Should I go VAS/VGS or to follow the VDHG or is there something else recommended for Australian newbies? 
What rate should we be buying ETFs after we have used our savings? I plan to sign up with self wealth and buy them fortnightly when we get paid. Should it be more or less frequent than this?
How big should our emergency fund be? Is $20 000 enough?

2. Does anyone have any tips on how to reduce our spending? I know overseas travel is a big chunk and we can definitely reduce that if we choose to go to cheaper countries etc. I’m happy to reduce the travel budget if it’s actually too extravagant but I also want to balance us travelling whilst we are still young with saving money.

3. Is it worth maxing out our superannuation or is it better to invest the money into ETFs instead?

Thank you for any advice and opinions

 

[MrThatsDifferent]

Hi and welcome. One thing that might be helpful is to read the Australian investing thread under the investor forum section. There’s also an Australian section under taxes that’s helpful.  I also recommend reading Barefoot Investor.

As for your individual questions.

1. I think you can go either option you listed, it depends on how much time you want to spend re-balancing and doing your trades. I realised I’m not great with this and wanted something as easy as possible so I just opened the high growth Lifestrategy fund with Vanguard and then bpay money there every fortnight I get paid. I’ve worked out what I have left over from expenses and send that. That should work out to $$2-3k every fortnight for you. If you deposit over $100k you get charged the least fees.

I maintain a very small emergency fund. I keep my emergency money in an online bank, separate from the one I get paid into. Look at something like Ubank, you’ll get the highest fees for savings. Australia is a bit different than the US, you probably have permanent employment and can’t be fired easily, so you don’t have that to worry about. You also don’t own your home so don’t have to worry about a sudden cost. You both have a high salary combined so worst case, if you need money, just don’t transfer to your index account that fortnight or month. It’ll be rare that you need more than $5k in cash for anything. If so, just keep that amount in an online account. With the online accounts, you have to deposit a minimum to get the maximum rate.

2. The other thing I’d recommend is having credit cards with reward points (always pay your balance), the credit card can act as an emergency account, as well as let you build,points you can use. Look at pointshacker au and learn how to get the most points.

Sydney is expensive and honestly I don’t see how you could spend less unless you went crazy and moved into a share house but you’re too old for that. If you have a kid your expenses will skyrocket particularly with childcare and school fees.

3. I think you both should max out super, best return you’ll get because of the tax advantages. Super is pretty powerful.

So for FI, you can track your networth by creating an excel spreadsheet and for each month, and each year, record what your balances are for:
A. Your regular checking/savings account
B. Your separate Super amounts
C. Your combined Vanguard amount
D. Your online emergency account

You’ll really see how your money grows. Leaving it in the regular checking is leaving so much money on the table. I also,think it’s smart to rent and invest instead of buy in Sydney. Once you build a stache, you could always look at buying something more reasonable somewhere else as an investment, but that’s a lot of work. Index shares seems much simpler and easier.

[marty998]

Hello fellow harbour citizen! Are you North or South of the bridge?

I have a few questions:
- Would you consider an investment property with the $220k cash?
- Your health insurance is high, presumingly because you've either got high extras cover, or obstetrics cover? If you're firm on not having children at the moment, it might be an idea to drop obstetrics , and regain it when you need to.

Unless you're willing to backpack and/or camp, you're unlikely to get much change from $10,000 for an overseas holiday for the both of you. If you properly cost out flights, accommodation, food and spending money and things like Visas and passport renewals. Maybe the bogan areas of Bali and Thailand but not many other places worth seeing for any length of time.

You have no money in your budget for hobbies - cycling requires a bike? gear? These things don't break the bank for you, but they do add up when combined with other missing items. What about money for replacing appliances? Fridge, washing machine, TV, furniture, laptops.

Clothing and shoes? Dentist bills?

Think about the misc column in your budget... I like to think my spending is low, but there's a lot of little items in there that you don't ordinarily consider day to day.

[mrmoonymartian]

Well done - you've made it here in decent shape.

+1 vote for investing the cash, and maxing out super. Especially if you mainly want FI, not RE. Could also consider non-concessional contributions at a later stage if you're still happy to work till preservation age. Just be aware that "shit can get old, fast".

$2000/year on rego and insurance seems high for a car that you rarely use and your BIL sometimes uses. Would occasional Ubers by both parties be more cost effective? I probably spend about that per year on my car, in total. Including bomb insurance, fuel, rego, maintenance, depreciation, opportunity cost. I guess theirs is a more expensive A to B than mine. Is your generosity preventing a bigger problem from being addressed?

My travel recommendation depends how much you've experienced already. Everyone who can afford it should traverse some diverse parts of the world as part of their personal development. But beyond a certain amount there are diminishing returns compared to the foregone compounding returns if the money was invested instead. If it is just to get away and refresh there are cheaper ways to do that.

[Waterwheel]

Hello

Thank you so much for the detailed replies

MrThatsDifferent - I'll definitely check out the Australian investing threat. I'll also have a look at the Barefoot Investor. I like the idea of the spreadsheet. It would be motivating for me to see my net worth grow so I can keep adding money into investments in the long run
- thank you for the point hacker resource
- 5K is a very small emergency fund indeed! That will certainly take some getting use to but it is true that we could use the credit card as an extended emergency fund. I had never thought about it that way before.

Marty998 - I am south of the bridge.
- At the moment we would not consider an investment property. We would really like something low maintenance and would prefer not to have the hassle of property
-We have high extras cover. I should look into whether or not we would save more money if we dropped down to basic cover. The reason we are with HCF (which is a little more expensive) is that when I worked in the hospital, I asked the administrator which fund they had the least trouble getting money from when it was time to pay bills and at that time it was HCF. It's been a while now and I might have to relook at that cost
- I didn't think about money in the budget for replacing appliances or bike maintenance - that's an excellent point - how would you budget for these? Add the cost of fridge, TV etc and spread it out over 5 years or something like that?
--- we both already have bikes and gear and my husband does basic bike maintenance and we have a friend who can help us do most of the other stuff
- We haven't bought new clothes for a few years, but I should budget in a small amount to replace things that get worn down or torn. That will be hard to estimate. I might just document whenever we get anything outside of our regular budget to see what type of miscellaneous recurring costs there are
- Dentist bills are covered by health insurance

mrmoonymartian
- the car is a tricky situation and we are working towards selling it if we can. It won't be a permanent cost hopefully
- we both haven't travelled much to other parts of the world as we spent a lot of time being students. We both have no experience camping. Trying to see whether or not we could camp a bit locally in NSW and then other parts of Australia with our friends who have experience and then might be able to reduce travel costs when we go overseas by camping etc.

[marty998]

Nice, I am south of the bridge too :)

- I didn't think about money in the budget for replacing appliances or bike maintenance - that's an excellent point - how would you budget for these? Add the cost of fridge, TV etc and spread it out over 5 years or something like that?

You file it in the back of the mind along with "other big shit that I might have to spend money on this year". You then make sure your emergency fund can cover a few of these big items going kaput at the same time.

You don't have to keep your emergency fund in cash. It could be space on your credit card, or a small portion of your investments in shares.