Reader Case Study [Australia]: Plenty of Income, Less Financial Sense

[OzDoc]

Hi Mustachians,

Life Situation:
We are a couple of young doctors (Me: Late 20s | Partner: Early 30s) expecting our first child. We have been working for a couple of years after completing post-graduate medical degrees. We moved to Tasmania, Australia on short notice at the end of 2016 to further my partner's career. As a result of the short notice, I was not able to find full time employment nearby. Fortunately, I have been able to find lucrative short term contract work flying back and forth to the mainland in the meantime.

Financial literacy was not either of our strong suits, but with a child on the way we are motivated to change that. We have spent a long time in post-graduate education, and definitely let the lifestyle creep accumulate since being employed. We have not been diverting any of our income specifically to  long term savings/retirement, however we have been building an EF. For the last 12 months we fully catalogued our expenses with YNAB in anticipation of getting a hold on our finances, so most of the information in this case study should be accurate.

This year is unusual for us for a few reasons:
* Moved out of PPOR in January, changed this property to rental/IP (no previous experience as landlords)
* Renting a fixer-upper with plan to buy this property after selling our IP in future. Bonus: It’s only 2km from work.
* Partner is likely to take 6 months off following our baby’s birth, so we’ll be on my income alone
* I’m working as a sole trader [business] doing short-term high-pay contracts

****************************************************************************************************
Income: Employment

Me:
Gross Salary:         ~$180 000 (increased temporarily from around $85 000)
Income Tax:          ~$58 147 (estimate from ATO*)
HECS Repayment:  ~$11 270 (estimate from ATO*)
*Australian Tax Office

Partner:
Gross Salary:         $84 478
Income Tax:          $29 202
HECS Repayment:  $5 491


Income: Rental Property/Previous PPOR (Melbourne)
Monthly Rent:                      $1950
Expenses (total):                 $2250
- Mortgage Payments:          $1700
- Insurance:                        $100
- Water:                              $50
- Rates:                              $160
- Management Fees:            $150
- Land Tax:                         $62

~Net Income:                    $160 068
                                         $13 064/month
****************************************************************************************************
Bills and Expenses              Monthly
Rent                                   $1085
Electricity                            $115
Internet/Mobiles**               $340 [Internet $200, Mobiles $70x2]
Health Insurance                 $321
Groceries                            $900
Dining Out                          $375
Transport                            $1000 [Interstate flights for work]
Car Repairs/Registration      $300
Medical                               $250 [During pregnancy]
Dog                                    $250 [Puppy, this should decrease over time]
Professional Fees                 $500 [Medical registration, insurance, exams, college fees - likely to increase]
Financial Fees                     $50 [CC annual fees, accountant fees, banking fees]
Home Improvement            $1000 [Furnishing house, renovations, moving costs]
Clothing                             $300
Holidays/Travel                   $750 [1 overseas holiday/year + 1-2 music festivals on the mainland/year]
Subscriptions                      $60 [Netflix/Spotify/Adobe/Office/YNAB]
Fun Money (Him)***           $300
Fun Money (Her)***            $300

Total (bills/expenses):      $8196
**High cost internet as tied to Telstra and required for work in remote areas
***Mostly spent on additional take away when on our own, a photography hobby, or alcohol

Debt Payments (minimum)
Medical Student Loan:       $950
Undergraduate Loan:         $160
Home Deposit Loan:          $740
CC (Amex/Visa):               $0 [Balance paid in full each month]

Total (debt payments):      $1 850

Total (All Expenses):         $10 046/month
****************************************************************************************************

Assets:                             $658 500
Mortgage Offset                     $37 000 (EF + parked income tax paid quarterly to ATO)
Superannuation (His):            $21 000 with HostPlus
Superannuation (Hers):          $18 000 with TasPlan (changing to HP soon)
Melbourne Property:               $590 000
Toyota Prius (2006)*:             $6 000
Mitsubishi Mirage (2013)*:      $6 500
*Paid cash, own outright

Liabilities:                         -$772 354

1) Melbourne Mortgage | Balance: $531 000
- Terms: Interest only @ 4.39% until 2021, then P+I for 20 years
- Years remaining: 24

2) Home Deposit* | Balance: $50 489
- Terms: P+I 8 years @ 5% [Fixed]
- Years remaining: 7
*(Partner’s parents provided deposit for above, we’re paying them back with the above terms)

3) Canadian Medical Student Loan | Balance: $84 951
- Terms: P+I 10 years @ 2.7% [Variable]
- Years remaining: 8

4) Canadian Undergraduate Student Loan | Balance: $7 964
- Terms: P+I 10 years @ 5.2% [Variable]
- Years remaining: 5

5) HECS Loan #1 | Balance: $65 965
- Terms: Paid through taxes, indexed annually to CPI (1.5% in 2016)

6) HECS Loan #2 | Balance: $31 985
- Terms: Paid through taxes, indexed annually to CPI (1.5% in 2016)

Net Worth:                           -$93 854
****************************************************************************************************
Some Goals:
1) Significantly limit our overconsumption and start making more considered financial decisions
2) Achieve a positive net worth within 2 years
3) Plan to FIRE or at least cut back to self employment and reduced hours by ~age 50 (20 years)
4) Raise a financially literate child!

Plan:
1) Divert 100% of partner’s income into savings/debt repayment, live on my income until Feb 2018 when we both go back to work and my salary drops to 85K/year again.
2) Sell Mitsubishi Mirage (hardly used at present since moving to new home)
3) Sell IP and purchase Hobart property as PPOR (unsure of timeline)

Questions
1) We only purchased the Melbourne property in 2016, is it sensible to try and sell this soon and purchase our current rental home (the current owners have agreed to this)? The value of the two properties is very similar (within 20k).
2) Our mortgage is at 4.39% and we have some loans over this value, advice re: paying these down or just topping up the offset account?
3) At what point should we consider investing outside of superannuation? When all debts paid?
4) Changing to HostPlus for superannuation, heard good things from a few others (low fees, ETFs), is this a good idea?
5) Any other Tasmanians on here?

I know that we have plenty of areas to cut back on significantly, and we have a very non-moustachian budget at the moment. Please feel free to throw punches, I expect to be extensively trimming the fat and appreciate the feedback. Thanks in advance.

[happy]

Welcome Ozdoc!  I'm too tired to be too analytical after a long day, but for sure you can trim -  $8k expenses a month - holy guacamole! A number of Aussie families live on less than 4k a month. Posting to follow.

[marty998]

Me too... it's too tiring to run numbers after spending an entire day in front of spreadsheets :)

Welcome to the forums.

You guys are going to kill it with future earnings - I would therefore hang onto the Melbourne property. The world belongs to people who have capital, and it generally always makes sense to keep acquiring investments.

Do you have to pay strata or land tax on the Melbourne property?

Easy wins would be the grocery budget and the dining out. If you are spending most of the fun money on food and wine, then you are really spending 900 + 375 + 300 + 300 = $1875 per month or $22,500 per year just on eating.

That's about the rate of the full age pension :O

[OzDoc]

Cheers guys - nice to see so many Australians on this message board.

It's certainly been a bit ridiculous for the last couple of months, and the crazy grocery/dining/fun money budget is on the chopping block.

Our spending definitely hiked up 2-3K/month when I started doing interstate work and the food budget reflects that. I average 3-4 different cities/month and I'm only home for ~3-4 days/month at the moment so we're kind of living like two single people.

@Marty: I didn't know anything about land tax until you mentioned it... and yes.. yes I do. But looks like it won't be until next year as we only started renting it out in February and were owner occupiers before that. Came here for financial info, left with another $750/year expense.

[Laura33]

Why are you hanging on to a property that is costing you $300 each and every month?  That's not a business, that's a hobby -- or, at best, speculation (you're basically taking a monthly loss in the hope that property prices keep going up).  I don't know the Australian tax system -- are there significant tax benefits that mean you're actually making money from the rental on a net after-tax basis?  If the property is in fact generating money, you can keep or sell it as you choose; if it's costing you money, I'd sell that puppy immediately. 

Otherwise, your plan looks good -- take the time pre-baby to pay down that debt, cut your costs, and get used to living on a single income, and you'll be in great shape moving forward.

[OzDoc]

Thanks for the reply Laura. Our property situation in Melbourne is a bit odd, we had to move out very quickly 2 months ago in order to transition to a new job/state. The rental market snapped it up pretty quickly and we have tenants for the next 12 months. There were a lot of sunk costs in purchasing the property initially and there will be more when we try to sell it.

At the moment we can claim the $300/month loss as a tax deduction, so it may make sense to continue to hold onto the property if it is gaining at least 4K in value per year.

ATO Website Negative gearing:
"A rental property is said to be 'negatively geared' where the deductible expenses (including interest on the loan borrowed to finance the property) exceed the income earned from the property.

The overall tax result of a negatively geared property is a net rental loss. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income – such as salary, wages or business income – when you complete your tax return for the relevant income year."

[marty998]

@Marty: I didn't know anything about land tax until you mentioned it... and yes.. yes I do. But looks like it won't be until next year as we only started renting it out in February and were owner occupiers before that. Came here for financial info, left with another $750/year expense.

You will be pleased to know that land tax is tax deductible. so the actual cost will be $750 x (1-marginal tax rate).

Why are you hanging on to a property that is costing you $300 each and every month?

It makes perfect sense to incur a $4000 cash loss (pre-tax) when your property goes up in value by $100k or more per year.

Until at which point the music stops and you're left holding the baby. But chances are you'd still come out well ahead.

[happy]

On balance I think I would keep the Melbourne property - you've already done the hard work setting it up as a rental. You will lose quite a bit selling so soon. Also are you sure you will stay in Hobart?  I would pay off the loans with a rate higher than your mortgage first, and then stash cash in your mortgage offset account, until that property is cash flow positive.

You could then think about buying the house you are renting as a fixer upper if you wish. I'd just pay the minimum off the low interest loans until you are a bit further ahead.

Re saving outside super - in a sense your melbourne property fulfils this for the foreseeable future if you keep it. Whether you choose to do more property or then head towards shares is up to you.

I understand the pressures of your lifestyles, but you can save heaps more. Really its just a matter of giving it some thought and changing your habits.

1.Food/groceries - for two you should be able to get down to $600 at least. As you are travelling so much, try to work out a plan to save on buying meals. You could take some with you, but there are food restrictions in some states. Minimise all the eating out.
2. Electricity is highish. visit michaelbluejay.com to see his electric saving tips
3. Internet and mobiles - yikes, should be able to manage on half that easily
4. home improvement 12k a year...this needs to stop
5. clothes - 3.6k for 2???? I'm a consultant in a big city teaching hospital - I spend $750 max and whilst I'm not the most expensively dressed doc  in the hospital I fit in fine. Do project 333. Go for good quality classics for work.
6. travel - many on here hold this part of their budget dear, but 8k a year for 2? Explore Tassie on the cheap while you are there instead. travel hack points. etc
7. what on earth are you spending 7k of "fun money" on given the generosity of your budget? Try a no spend month, to see what you are frittering away.

Ok enough face punches, your cars are good! ( I love my Prius).

[OzDoc]

Thanks for that detailed reply happy. Nice to know there are some other medicos around these parts.

We're pretty confident that we'll stay in Hobart as my wife is on a training program tied to that state. She should ideally be finished in 5-6 years depending on leave while having kids. The Hobart property has room to run an Airbnb as well (we have done this in the Melbourne property previously and were pulling in ~15K/year).

Part of moving to Hobart is to downshift with respect to lifestyle spending that was ridiculous in Melbourne.
1) Food is starting to pull in this month, we're relying on a local Farmer's Market weekly (although still somewhat expensive). Not too many bulk food stores in this state.
2) Our Electricity numbers were for the past 12 months in the Melbourne property, not sure what our baseline will be in Hobart, but I anticipate they may be higher given the reliance on heating a fairly old home.
3) The internet prices are only temporary, and a large portion of them are a tax write off. But yeah, we used to be <$120/month so I know these can be cut back next year.
4) That home improvement budget was an average over the past 12 months. We spent too much furnishing our home and then moving it all to Hobart. Should be able to cut that back by >80%.
5) Thanks for the tip re: project 333, the clothes budget was blown out on technical gear for back country hiking in Tassie. Hopefully much less than 1K this year.
6) Travel will be a challenging one for us as all our family live in Japan and Canada... This year we're being much more sensible with points and have 400K FF Qantas points accrued so I am hoping this budget can also be significantly slashed. After the baby is born I suspect we'll be much more grounded in Tasmania.
7) That 7K was largely spent on takeaway coffee, camping equipment and photography gear... all those expenses have stopped at present. We spent <$50 each in March.

Our Prius battery failed last month though - 2.5K to replace, but hopefully good for another 150 000 km

Cheers!

[happy]

I completely understand getting out of a large city like Melbourne - I downshifted out of Sydney 21 years ago and haven't regretted it a minute. Tassie is completely gorgeous and I have considered moving there in retirement but I have family ties in NSW, which complicates things a bit.

Sounds like you have good insight into your expenses already and a good plan. 

Overseas family requires travel built into your numbers... and points hacking can be very helpful ( not as good as US, although its picked up a bit recently). I'm only just getting into this, prompted by a post by The Mad Fientist http://www.madfientist.com/other-portfolio/, referring to ones points as an additional portfolio to accumulate for travel in retirement ( or before). Try http://www.pointhacks.com.au - copious posts and emails but all good stuff. Seems you can elevate it to an art form...

A very young baby - say less than about 9months  - especially if breast fed, is actually more portable with regard to travelling than a toddler.  The first is always a bit daunting, but its easier to travel with just one young one than you might expect. Arebelspy has posts on his travels with his bub born in Turkey, and there's always Go Curry Cracker http://www.gocurrycracker.com to check out.

How many km before the Prius battery died, just out of interest? I getting up toward 160,000km, no signs of battery fade yet. did it die suddenly or did you have warning signs i.e. less EV and more petrol engine use?

[bigchrisb]

Welcome to another Aussie!  Sounds like you have high income now, and likely to be higher in the medium term.  Great long term prospects!  Congratulations on the expecting kid too.  I'm in the same boat, and very excited about it (although a little freaked out about what it does to our income/expenses profile)

A few questions for you in the short term, as it would seem that you are in for a bit of a cash flow crunch?

1. You are ahead by about $3k a month in your current situation, but you are never there and playing FIFO.
2. You haven't said if your partner will take paid mat leave for the 6 months or if unpaid.  If not, that's 6 months where you are down her income (about $4k/month net).  This means you will be short $1k/month during this time.
3. Are you paying youself super, or banking for annual/sick leave out of your FIFO work?
4. Continuing the FIFO while there is a new kid is going to be tough.  I'm assuming you will want to be there for the birth and a few weeks after, minimum?  What does that do to your cash flow estiamtes?
5.  You both go back to work, your income drops to $85k.  You are then getting about $4k/month net for your salary, another $4k if your partner is working full time.  That leaves you $2k/month behind, without any allowance for childcare.

Given this, I'd be focusing on:
1. Reduce expenses where you can.  Ditch a car is easy.  I'd look hard at that $1k/month in home improvement, and think about the holiday/fun money. 
2. Plow the extra into the offset.  Cash flow is going to be negative if you do nothing, tight if you cut back a bit after the kid arrives.  I'd want anything extra you can save over the next 6 months available to draw down on and get you through that period.
3.  I'd worry about other investment once your cash flow position improves. 

[OzDoc]

@Happy: Thanks for the travel tips and the advice re: travelling with a young baby. Our prius battery died with about 140K on the odometer. There was almost no warning, just suddenly a large exclamation mark in a triangle. This is the 'Blue screen of death' for the prius and usually means there is something wrong with the battery. The Prius then transitions to a 'limp-home' mode with almost no acceleration and a top speed ~40-50km/hr. Unfortunately I don't have data to show whether or not it was losing efficiency prior to the failure.

@bigchrisb:
I'm actually in the process of changing from a FIFO to a 'unsocial hours' job that will be based in Hobart for similar pay. Rather than FIFO I'll be on a 18:00-01:00 shift M-F and a little weekend work. Hopefully that has fully transitioned by the time my wife takes off work. Unfortunately since we have switched employers she won't qualify for any paid maternity leave so we'll be going without her salary for that 6 month period. To adjust to that we have been living on my salary for the past 2 months and socking all her income into the EF/Offset.

I'm not paying myself any super at present, my (limited) understanding of the superannuation rules that are changing on 1st July, 2017 had me thinking that it would make more sense to do this from July onwards. Happy to hear any arguments to the contrary if anyone has an opinion on this.

I will also take about 4 weeks off at some point during the maternity leave period for a meet-and-greet trip to Japan/Canada with the baby.

Thanks very much for your input!

[bigchrisb]

Is your new Hobart job as an employee or continuing as a self employed contractor?

[OzDoc]

I'll still be self-employed and paid through my ABN in Hobart. Likely to resume employment in the traditional sense again in February.

[JLR]

You have received some great tips above and seem to be heading in the right direction (eg. less 'fun' money spent last month).

My only question is: why are you paying for water on the IP? Our LL was paying our water until recently because he hadn't installed flow restrictors. He installed them, we pay for the water and save $200/qtr on our power bills from using less hot water. Win/win. But if the water isn't metered separately (eg. units on the one meter) this won't help you.

Make sure you stick with the tips above, keep working on trimming the fat. You'll do great. :)

Just make sure you don't make spendy friends in Tassie!