Author Topic: Australian Investor - Where do I start?  (Read 15109 times)

KittyZero

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Australian Investor - Where do I start?
« on: March 05, 2016, 11:34:49 PM »
Hi Everyone! I apologise in advance as I can only imagine how many times this may have come up. But I am after some advice on where to start. I am interested in building my wealth, and retiring early.

My situation:
I am 32, ready to marry my BF of 7 years and start our family.
Our combined wage is about 180K BT. I earn 120K BT.
I am the one trying to come up with the plan! Although feel as though I have some buy in from him too but we seem to but heads some times on where to invest and why, I think know its because we don't know enough.
His Loan: $2000, will be gone by July. Its set and he cant pay more in to it.
My Personal Loan: $6000 will be gone by May if not sooner.
Our Mortgage: 180000 (I think the house is worth 210, so what is that...30000 equity?)

So looking at when our loans are completely gone. Our minimum repayment is 900 P/M on the house. I have worked out that we should have approx 2500 P/M spare to invest where we see fit, either on to the house or invest in stocks/properties etc.

I am thinking it would be a good idea to double the house payment, and maybe 2000 in to investments? What do you think about that? Maybe some pre-tax super contributions to lower my tax? I don't really know what is best, to pay off the home loan BEFORE i even think about investing, or pay it down a bit more AND invest.

I don't even know where to start with my portfolio. I want to invest in 1 additional property and stocks. I have picked 3 companies, but still I don't feel I have enough money to even start.

I need a plan, but I dont know how to make a plan. I know I want to look at semi retiring in 10 years, fully retiring in 15 but is it a pipe dream I want to do it early but feel its impossible. I'm feeling quite overwhelmed, but I love researching and studying - I am happy to put in the work and I feel like I am learning more and more each day. I have a few months before at least my personal loan is paid off to be confident to make my first investment. Should I wait and save in to the home loan until I have 10000 to invest and do it then, or start with my idea of $1000-$1500 parcels to the stock market and just keep investing as we go?? All I have is $2000 worth of stock in one company that have been given to me over the years by the company I work for and I just signed up for their reinvestment program.

Does anyone have any advice? Any articles or books you would recommend? I'm just overwhelmed. Feel like there should be a course out there for me. Would you suggest I pay someone for advice? Not on what stocks or property to buy, I want to do that on my own. I have fully investigated the companies I have decided on so far which is 3 and I will continue to do this, but I need advice on how to structure my portfolio and investments.

potm

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Re: Australian Investor - Where do I start?
« Reply #1 on: March 05, 2016, 11:45:40 PM »
Put all the money into the mortgage. Get a loan using the house as equity to buy shares. More tax effective that way.

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #2 on: March 06, 2016, 12:08:17 AM »
Thank you for the advice. We have decided that we are absolutely against any loan to invest in stocks - it's out of the question for us. I'm all for tax effective ways, but we just simply do not want any more debt whatsover especially if that debt is used to invest in something I am just not confident I know enough about. We are just not confident in this method at all :( If I knew more about what I was doing? Hmm still I dont think I would be confident in taking out a loan. I feel as though I earn enough to get in to this market with what I have. Maybe I am wrong though...I just dont know.

steveo

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Re: Australian Investor - Where do I start?
« Reply #3 on: March 06, 2016, 12:38:43 AM »
My take is as follows:-

1. Pay off all personal debt excluding the mortgage first.
2. Pay off the mortgage.
3. Work out how much you want in Super and outside Super.
4. Salary sacrifice into Super to meet your target amount. Make sure your Super account is a low fee option.
5. Buy vanguard ETF's with your non-Super portfolio. VAS, VGS & VAF. Work out how you want to split your outside super funds within these 3 funds.

I don't believe in taking on extra debt and I reckon the best way to reach FIRE as quickly as possible is to watch how much you spend.

Inquisitive1

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Re: Australian Investor - Where do I start?
« Reply #4 on: March 06, 2016, 12:54:36 AM »
We were in a similar position, now 38 and have moved down the track a little. My view would be similar to steveo, get rid of all debt, it reduces a heap of relationship type stress as well, more than a few of my friends relationships have suffered significantly due to poor financial decisions.

Kick total super contributions to around 15% pretax earnings and estimate your preferred final super balance just before you plan to use it around 60. From there you will be able to calculate the CAGR you need to hit 'on average' to get to your target balance. Base the estimate of a ~4% withdrawal to meet your estimated income needs. The lower the CAGR required the better!

Then save in your personal names, keep most of the income earning assets in the lowest income earners name. When your super is set and you have saved enough ex super to last until you hit 60 you are completely free. At the end of the saving journey try to resist the 'one more year syndrome', we are struggling with this one now.

Read, read and then read some more. I would suggest start with John Bogles, Common sense on Mutual Funds and then William Bernsteins The four pillars of investing. These two are absolute gold and when you really understand the themes you will have just about everything you need to be successful.
It will take some work but it is absolutely doable!

Cheers,

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #5 on: March 06, 2016, 01:02:59 AM »
My take is as follows:-

1. Pay off all personal debt excluding the mortgage first.
2. Pay off the mortgage.
3. Work out how much you want in Super and outside Super.
4. Salary sacrifice into Super to meet your target amount. Make sure your Super account is a low fee option.
5. Buy vanguard ETF's with your non-Super portfolio. VAS, VGS & VAF. Work out how you want to split your outside super funds within these 3 funds.

I don't believe in taking on extra debt and I reckon the best way to reach FIRE as quickly as possible is to watch how much you spend.

thank you. Do you mean by number 2 that I shouldnt invest anything until I pay off the mortgage?
Absolutely agree with 3 and 4, this makes total sense and I will definately do this.
RE: 5, I dont really know anything about these vanguard ETF's or what VAS, VGS or VAF is but I expect is no different to my super fund except I can access when I want?
Does this mean you dont suggest even thinking about picking my own stocks, going in to the property market or anything outside of this? Even if I am committed to doing the utmost research before I do?

steveo

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Re: Australian Investor - Where do I start?
« Reply #6 on: March 06, 2016, 01:37:40 AM »
KittyZero - I personally don't see the point of investing while you have a mortgage excluding Super and possibly salary sacrificing into that. How much to put into Super though is the real question. You can't access it until 60 or later so I think you need a lot outside of Super. Once the mortgage is paid off then I would invest into money outside of Super.

VAS = Australian Shares.
VGS = International Shares excluding Australia.
VAF = Australian Bonds.

We will invest more money outside of Super than in Super because we can't access Super and we are looking to retire before 50. We are also going to invest 50% VAS, 25% VGS and 25% VAF. I think that you should work out the asset allocation that you think works and then invest within that allocation. Your choice can be different to my choice.

I have no interest in investing in property (apart from your own home) or individual stocks. I think it's so much easier to just use the indexes and I think it will work out better in the long run. Less stress, greater diversification plus it's simple and requires no thought.

We are following the exact plan that I've said here. We have just paid off our mortgage and are now putting our savings into ETF's.

I would though research asset allocations and work out what you feel comfortable with. Boglehead's is a good site. I think The Intelligent Asset Allocator is a good book by William Bernstein. I've read some of his other books and I think they are great. In stating that my asset allocation is really simple. I know that there are potentially better ways to allocate your assets but the future will turn out differently than the past and I like the idea of being 100% confident that I won't stuff myself up. I'll do well with our plan. I might not get the best returns but that is going to be so rare it's not funny.

If that is all too hard for you it's easy enough to just invest in a single Vanguard fund. You will do extremely well with this as well.

Once you get into low cost index funds with a reasonable asset allocation I think the difference in returns will be basically trivial and meaningless.
« Last Edit: March 06, 2016, 01:39:48 AM by steveo »

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #7 on: March 06, 2016, 02:10:30 AM »
Isn't the point of investing whilst I still have a mortgage is that in the long run I will be far better off financially? I guess I am really confused as a lot of the advice I have been reading is that if you want to build long term wealth, putting everything I have in to my homeloan is not the wisest long term choice. I mean I am not suggesting I don't pay any extra in to my loan, but is this not the same as saying its not worth investing in an investment property until your current property is completely paid off? Dont a lot of people invest even if they have some secure debt? I guess now I am just more confused :( Even though I do appreciate everyones advice.

steveo

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Re: Australian Investor - Where do I start?
« Reply #8 on: March 06, 2016, 02:27:50 AM »
Isn't the point of investing whilst I still have a mortgage is that in the long run I will be far better off financially? I guess I am really confused as a lot of the advice I have been reading is that if you want to build long term wealth, putting everything I have in to my homeloan is not the wisest long term choice. I mean I am not suggesting I don't pay any extra in to my loan, but is this not the same as saying its not worth investing in an investment property until your current property is completely paid off? Dont a lot of people invest even if they have some secure debt? I guess now I am just more confused :( Even though I do appreciate everyones advice.

My opinion is that carrying debt doesn't work out for you.

So if you pay 5.5 % or thereabouts in interest and there are no tax benefits ala your own home mortgage in Australia it's pretty hard to beat that return. You are basically guaranteed a return over 5% tax free by paying off your mortgage. Is it realistic to beat that over time. I don't think so.

Lot's of people probably do invest in investment properties but I think that is even worse. You are putting a tonne of money into the housing market which probably will in reality entail well over 50% of your asset allocation even if you don't purchase any property other than your own home.

It's your call but we are now debt free and I definitely don't regret the decision. I also think rationally it makes sense to pay off the mortgage rather than invest in other asset classes.


KittyZero

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Re: Australian Investor - Where do I start?
« Reply #9 on: March 06, 2016, 02:40:40 AM »
Ok thanks for the advice and it does make sense, and it is weighing on my mind. I have a 4.86% interest on the homeloan. I think I would still like to explore the idea of paying extra in to the loan to et it paid off a lot quicker. But I do still like the idea of investing a little outside of thing. I will keep researching.

Rob_S

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Re: Australian Investor - Where do I start?
« Reply #10 on: March 06, 2016, 05:49:17 AM »
I'd focus on paying down the mortgage, its boring but given both your tax rates looks to make the most sense. As Steveo points out it's going to get you the best bang for your buck. I would look at refinancing the mortgage to a lower rate with an offset if you can. Ubank, Loans.com, ING are some options. It wont take you long to smash that mortgage down to zero and then the fun begins.

I don't think Salary Sacrificing makes much sense if your going for FI in the next 7 - 10 years or so. If either of you were at the top marginal rate then perhaps it makes sense from a tax savings pointof view but even then I wouldn't bother. As it stands it simply wont be available early enough to matter. Plenty of people on the forum disagree though... I think I'm the odd one out in not factoring super into my FI calculations.

How long till you start a family and what's the plan work wise when you do? That will change everything and will make saving a lot harder.

Reading wise I highly recommend William Bernstein's easy to read 'If you can'.https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjW3YT-iKzLAhULjJQKHYs-AtMQFggbMAA&url=https%3A%2F%2Fwww.etf.com%2Fdocs%2FIfYouCan.pdf&usg=AFQjCNEgpHfVPx0v9LQAMJCm8ds9gLYkmg&sig2=PDazbUqBXszHTZQTtqxoWA&bvm=bv.116274245,d.dGo His book 'Four Pillars of Investing' is brilliant but probably not for beginners. I'm reading it through for the second time right now.

I also recommend Peter Thronhill's 'Motivated Money' for a non biased look at Australian investing with a focus on shares. Maybe he is biased towards shares but his enthusiasm is infectous and his arguments sound. It's another easy to read book that you should be able to get it through the library. Peter recorded some of the main points from his book in a YouTube series: https://www.youtube.com/watch?v=kLKzI-zZadY

Another great resource is the US centric look at common sense investing from Jim Collins stock series: http://jlcollinsnh.com/stock-series/

That should get you started. Happy reading.
« Last Edit: March 06, 2016, 06:00:42 AM by Rob_S »

steveo

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Re: Australian Investor - Where do I start?
« Reply #11 on: March 06, 2016, 12:40:53 PM »
I don't think Salary Sacrificing makes much sense if your going for FI in the next 7 - 10 years or so. If either of you were at the top marginal rate then perhaps it makes sense from a tax savings pointof view but even then I wouldn't bother. As it stands it simply wont be available early enough to matter. Plenty of people on the forum disagree though... I think I'm the odd one out in not factoring super into my FI calculations.

Super counts in my calculations. We have about 250k in there now. That is a chunk of money and I think you should count it. In stating that salary sacrificing is a different topic. Not being able to access it until 60 means that we need more money outside of Super. I don't think we will be salary sacrificing any extra into Super.

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #12 on: March 06, 2016, 02:33:31 PM »

How long till you start a family and what's the plan work wise when you do? That will change everything and will make saving a lot harder.


I plan on it within the next 2 years. Luckily with my job I have the option of working from home and already am a few days a week, so if I have a family I will likely take my 3 months maternity leave at full pay and go back full time, or at worst 6 months half pay then return. This will allow me to stay at home raising the children whilst I work. This will be possible with the help of family and my partner. He might cut his hours back if he chooses. So I don't expect that my having a family will impact us greatly (specifically in terms of our incoming wage anyway).

Also an interesting comment about the super, I will keep that in mind.

I think I need an estimate of how much income I would earn per year off a 300, 400, 500K investment, and take that in to consideration with the investment property we want to have also. I know I need to make a plan of where I want my investments to be in the next 5, 10 and 15 years and beyond to work out how to get there, so knowing how much (in and out of super as you say steveo) I need to aim for will help me work on my plan.

Thanking you all so much for your comments.

deborah

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Re: Australian Investor - Where do I start?
« Reply #13 on: March 06, 2016, 03:22:20 PM »
I followed  stevo's plan (although never had a personal loan). Paying off the mortgage works well in Australia, especially if you have a mortgage offset (because you can have all your emergency funds in that), because of the way our tax system works, and extra money used paying off the mortgage is not taxed, whereas all income is (including from bank deposits).

My take is as follows:-

1. Pay off all personal debt excluding the mortgage first.
2. Pay off the mortgage.
3. Work out how much you want in Super and outside Super.
4. Salary sacrifice into Super to meet your target amount. Make sure your Super account is a low fee option.
5. Buy vanguard ETF's with your non-Super portfolio. VAS, VGS & VAF. Work out how you want to split your outside super funds within these 3 funds.

I don't believe in taking on extra debt and I reckon the best way to reach FIRE as quickly as possible is to watch how much you spend.

I reached FIRE quite quickly following the plan, and only ever having the mortgage loan - I never took out any others. I could have retired at least 10 years before I did, partly because I bought a cheap rundown house, and did it up as I gradually had the money. That meant I didn't have a large mortgage, and paid it off much more quickly than anyone believes.

Sure, you can borrow to buy shares, and an investment property and a nice holiday, but every time you borrow, you increase risk. And you CAN be FIRE without it. The ASX themselves have put out figures that indicate there is only a small advantage in having a loan to buy shares.

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #14 on: March 06, 2016, 03:33:51 PM »
Thanks deborah. I certainly wont be borrowing to buy shares, out of the question! However we are looking at getting an investment property, and eventually will be looking to invest in shares. Our house was cheap. We got it for far less than what it was worth as I bought it off a family member. Its not 'run down' as such - its quite a nice house, but does need some work to get it all nice like replacement flooring and outside steps etc. But it was the perfect house for us, i had been renting it for 10 years before I bought it. And it is situated perfectly in between both our work which are only a few minutes away. If I go pretty hard at it, it could be gone within 5 years. But my BF is a bit worried our quality of life will really suffer, so I need to budget appropriately to make sure that we still enjoy things like holidays etc.

steveo

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Re: Australian Investor - Where do I start?
« Reply #15 on: March 06, 2016, 11:09:53 PM »
Sure, you can borrow to buy shares, and an investment property and a nice holiday, but every time you borrow, you increase risk. And you CAN be FIRE without it. The ASX themselves have put out figures that indicate there is only a small advantage in having a loan to buy shares.

Yep. You can borrow money and it might work out. It might also not work out. It's a crap shoot. Why bother with the drama.

marty998

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Re: Australian Investor - Where do I start?
« Reply #16 on: March 07, 2016, 12:01:48 AM »
You want to start a family soon? You will need cash.

Unless of course you want to work all day to pay the enormous childcare bills.

Two words: Offset account.

Murdoch

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Re: Australian Investor - Where do I start?
« Reply #17 on: March 07, 2016, 02:33:36 AM »
Lots of good advice from some wise heads in this thread.
I'll add my own amateurish note.

Steveo's list is gold. Personal debt, then mortgage, then invest for retirement.

I'd skip any extra super contributions whilst you smash the mortgage. Relationship stress whilst living frugally to achieve a common goal is much less stressful than being a slave to a mortgage during tough times. It can be relationship building and very positively reinforcing to team up on that debt and work together. If you both went at it full bore, then in only 3 years you could be complete home owners right around the time you want to be starting that family. I can imagine worse goals. Your combined salary is great at present. Achieve as much as you can whilst it lasts.

Use the time whilst paying off the mortgage to learn about investing. Read, and read some more. Come up with a mock asset allocation, then track it during those years to see how you feel as it goes up and down, and try and get a feel for an appropriate asset allocation that suits both you and your partner. You may miss out on a rise in the stock market, or a fall, or a static period, but you'll be banking a guaranteed 5% on the mortgage, and be avoiding rushing into something you aren't yet comfortable with.

On another note, you are the main bread winner at present, but many couples go through periods where the main bread winner switches. It can be useful to be able to allocate earnings from investments to the lowest income earner, for tax efficiency purposes. When you buy in personal names, then that person must take the income and there is less flexibility. A Discretionary (Family) Trust in Australia is a way to jointly own investments, and you can then alter allocations from earnings to anyone in that trust. I'd recommend you read around this option whilst destroying that mortgage, and if it's something that may suit your situation, then when you start building your taxable investment fund of index shares you can do so in this structure.

I'll be interested to see which way you head, but certainly you are starting from a great position and simply getting on a forum like this and realising there is a lot to learn, is the first and most important step. Good luck.

Murdoch

happy

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Re: Australian Investor - Where do I start?
« Reply #18 on: March 07, 2016, 03:27:11 AM »
Good news: If you want to be FIRE in 10 years, you can, as long as you are mustachian.
Quote from BigchrisB #1122 Aussie investing thread

[quote/]There are many ways to skin this cat.  Its a long game, and without the benefit of hindsight, no-one will get a complete optimum!  Consume less, earn more, invest, compound, get on with life![/quote]

My take:

Super is investing - its just a tax shelter ( and usually shares unless you want to something fancy with a SMSF), so  the decision about shares is around what ratio inside super and what ratio outside. It depends on your age/ income/ time to FIRE, and personal view about how much you trust the gubmint to give you back your money.  The rules are likely to get somewhat less favourable in the future, and in the past gubmints have grandfathered in changes, so that is an argument for doing something extra now. On the against side is that, you can always put more in later on, but if you put too much in and run out of stash before you can get your hands on super thats also an issue and there is always the risk the gubmint will institute some draconian reform..


My order would be:

1. pay off peronsal debt
2. simultaneously 50% extra payment off mortgage principle and invest 50% ( either inside or outside super depending on your decision).
3. Agree with Steveo's points 3,4,5.

Reserve fancy moves like borrowing against your PPOR/margin loans etc until you are experienced and decide you have a high risk appetite.

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #19 on: March 11, 2016, 02:48:30 AM »
Thank you all so much for your help! For now I will definitely be smashing the mortgage whilst I continue to learn. If I am realistic, we should have it gone in 5-6 years. This might not be the totally mustachian way, but unless I define this plan to get some buy in with the other half to attack it sooner, that's the realistic. I'm lucky with my works policy I will be able to work from home until children are of school age, so I don't need to take time off work or pay for childcare, and I am glad we went a pretty mustachian route when we bought our house even if we didn't realise it at the time. Soon we also need to purchase an 'investment' property. This will be when the parents decide they no longer wish to maintain the larger property and downsize, we will purchase the downsize property for them to live in and we will reside in the larger fully paid off property (essentially swapping). At that point we should hopefully own this one fully paid off, and can decide to keep it as an income stream or sell it, pay off the smaller property and invest the surplus. I don't know. So much to think about. This whole thing is a bit overwhelming! BUT I am learning, and its all kind of fun to think about.

A few weeks ago I was looking at my super calculator in all my naiveness and wondering what my life would be like at 65 with 'all that money'! Today, I am thinking I could realistically retire at 50, likely even 45 and still feel just as well off. Its exciting, and thank you all for helping me on that journey. I guess i probably feel like others, wishin I had have found this sooner.

deborah

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Re: Australian Investor - Where do I start?
« Reply #20 on: March 11, 2016, 03:12:42 AM »
Before you do the house swap with your parents, look into the "granny flat" provisions - see https://www.humanservices.gov.au/customer/enablers/granny-flat-right-or-interest . I think that what you plan to do fits within the rules for "granny flats" and you may find that it ends up being a win for all concerned.

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #21 on: March 12, 2016, 02:26:52 AM »
Before you do the house swap with your parents, look into the "granny flat" provisions - see https://www.humanservices.gov.au/customer/enablers/granny-flat-right-or-interest . I think that what you plan to do fits within the rules for "granny flats" and you may find that it ends up being a win for all concerned.

Thank you I have never heard of this before. I will look into it :)

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #22 on: March 12, 2016, 03:02:23 AM »
Before you do the house swap with your parents, look into the "granny flat" provisions - see https://www.humanservices.gov.au/customer/enablers/granny-flat-right-or-interest . I think that what you plan to do fits within the rules for "granny flats" and you may find that it ends up being a win for all concerned.

Sorry Deborah, I dont understand this granny flat provision, do you know much about it? Does this mean they will sell the house to us, yet retain the right to live there? or that we have to live together? the informaintion doesnt seem straight forward and there isnt much information when you start looking. Its all the same explanation in the same wording and I just cant see where the benefit/arrangement is!!!!

stashgrower

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Re: Australian Investor - Where do I start?
« Reply #23 on: March 12, 2016, 04:51:35 AM »
KittyZero, do you mind if I ask a question to follow up on your post? My question and confusion is similar to yours, except replace "mortgage" with "saving for a house deposit". Apart from that difference, along with a much lower income, I had the same question of how to direct money into house deposit, share investments and salary sacrificing into super.

Reading this thread and translating, I think it boils down to this? Or are there other differences for my situation that I'm missing?

Translating steveo =>
   1. Pay off all personal debt [and save up for house first]
   2. Pay off the mortgage.
   ...

Translating happy:
   1. pay off peronsal debt
   2. simultaneously [x%] extra payment [into house deposit] and invest [y%] ( either inside or outside super depending on your decision).

Totally cool with steps 3-5, just wasn't sure if they should come in earlier. I think this thread helped me on that.

Ta!
« Last Edit: March 12, 2016, 05:51:40 AM by stashgrower »

Trevor Reznik

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Re: Australian Investor - Where do I start?
« Reply #24 on: March 12, 2016, 11:17:46 AM »
Thanks deborah. I certainly wont be borrowing to buy shares, out of the question!

I personally don't understand this.  If you're comfortable with the idea of say, paying extra on your mortgage and simultaneously investing in shares, you should be comfortable with borrowing to buy shares, because ultimately it is the exact same thing, except with tax benefits.

Say you have $10,000 to invest.  You could either buy $10,000 of shares with it

or

Pay the $10,000 off your mortgage, then take out a home equity loan for $10,000 and buy $10,000 worth of shares with it.

Same amount of shares owned, same amount owing on housing debt, but now the interest on $10,000 of your housing debt is tax deductible.  You can keep doing this until all your housing debt is tax deductible.  Sometimes people think they are being conservative when all they are doing is confusing concepts.

Also not sure on people saying you won't beat 5% mortgage interest in the share market.  Including franking credits the ASX pays out 7% dividends grossed up, so you're beating it straight away, then over the long term you can expect capital gains on top, unless you expect the market to plummet and never recover, in which case buy guns and ammo.
« Last Edit: March 12, 2016, 11:40:21 AM by Trevor Reznik »

deborah

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Re: Australian Investor - Where do I start?
« Reply #25 on: March 12, 2016, 12:16:45 PM »
Also not sure on people saying you won't beat 5% mortgage interest in the share market.  Including franking credits the ASX pays out 7% dividends grossed up, so you're beating it straight away, then over the long term you can expect capital gains on top, unless you expect the market to plummet and never recover, in which case buy guns and ammo.

TAX - the mortgage interest isn't, whereas the dividends are. When you sell the PPOR has no capital gains tax while investments do. That increases the actual %, and changes returns dramatically.

FFA

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Re: Australian Investor - Where do I start?
« Reply #26 on: March 12, 2016, 07:17:59 PM »
KittyZero, do you mind if I ask a question to follow up on your post? My question and confusion is similar to yours, except replace "mortgage" with "saving for a house deposit". Apart from that difference, along with a much lower income, I had the same question of how to direct money into house deposit, share investments and salary sacrificing into super.

Reading this thread and translating, I think it boils down to this? Or are there other differences for my situation that I'm missing?

Translating steveo =>
   1. Pay off all personal debt [and save up for house first]
   2. Pay off the mortgage.
   ...

Translating happy:
   1. pay off peronsal debt
   2. simultaneously [x%] extra payment [into house deposit] and invest [y%] ( either inside or outside super depending on your decision).

Totally cool with steps 3-5, just wasn't sure if they should come in earlier. I think this thread helped me on that.

Ta!

I'm inclined towards happy's approach also, although there's nothing wrong with offsetting the mortgage and in some ways it's safer to see a direct return on your savings from the reduced interest.

My general concept is to have an idea of where you want to end up at FI, and draw straight lines from today until that time. This is how to work out how to split your surplus funds between offset/deposit, shares, super. Check on the progress every year or so, and re-adjust the split as needed to stay on track.

The reason I favour this way over 100% debt elimination before investing, is for asset allocation and diversification. If you put it all on hold for 5 years or however long, the risk is the share market is a the top of cycle just when you want to shovel all your money into it. By starting now with a diversified portfolio in line with your long-term asset allocation, you average out and reduce this timing/sequencing risk. Of course it can be favourable too, you might find the sharemarket is at a low point and you were doubly better off by staying away. In my mind, rateable accumulation is the base case, and deviating either way is a timing risk (i.e. all into mortgage first is a bet on shares doing poorly / all into shares and minimum in mortgage is a bet on shares outperforming). However I appreciate most people will view mortgage first as the base case, and what happy/I'm suggesting as a "bet" on the sharemarket. It depends how you look at it.

Hope the above makes sense / helps....

stashgrower

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Re: Australian Investor - Where do I start?
« Reply #27 on: March 13, 2016, 01:53:06 AM »
Thanks, FFA, really helped hearing the "base case" and "bet". I hadn't even thought of the timing or averaging in that way. It added a new perspective and I'm seeing more of the nuances. Still learning.

I'm off to draw my straight lines now!

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Re: Australian Investor - Where do I start?
« Reply #28 on: March 13, 2016, 03:21:06 AM »
Also not sure on people saying you won't beat 5% mortgage interest in the share market.  Including franking credits the ASX pays out 7% dividends grossed up, so you're beating it straight away, then over the long term you can expect capital gains on top, unless you expect the market to plummet and never recover, in which case buy guns and ammo.

TAX - the mortgage interest isn't, whereas the dividends are. When you sell the PPOR has no capital gains tax while investments do. That increases the actual %, and changes returns dramatically.
That's funny you mention tax Debbie because you omitted the bit where I explained how to convert the housing debt to tax deductible debt while investing in dat der sharemarket, pretty much puts the tax argument to the sword when it comes to mortgage vs investing.  As mention ~7% grossed up dividends, the capital gains tax argument is also bunk, why would you ever sell shares if you're buying the XJO?

FFA

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Re: Australian Investor - Where do I start?
« Reply #29 on: March 13, 2016, 03:27:08 AM »
Thanks, FFA, really helped hearing the "base case" and "bet". I hadn't even thought of the timing or averaging in that way. It added a new perspective and I'm seeing more of the nuances. Still learning.

I'm off to draw my straight lines now!
pleasure. I found this book quite helpful  http://www.wealthfoundations.com.au/understanding-asset-allocation.html   (p.s. not a recommendation for wealth foundations I have never used them)

it talks about lifetime asset allocation and there are some examples of the rateable accumulation concept I talked about.

all the best !

deborah

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Re: Australian Investor - Where do I start?
« Reply #30 on: March 13, 2016, 04:20:43 AM »
Also not sure on people saying you won't beat 5% mortgage interest in the share market.  Including franking credits the ASX pays out 7% dividends grossed up, so you're beating it straight away, then over the long term you can expect capital gains on top, unless you expect the market to plummet and never recover, in which case buy guns and ammo.

TAX - the mortgage interest isn't, whereas the dividends are. When you sell the PPOR has no capital gains tax while investments do. That increases the actual %, and changes returns dramatically.
That's funny you mention tax Debbie because you omitted the bit where I explained how to convert the housing debt to tax deductible debt while investing in dat der sharemarket, pretty much puts the tax argument to the sword when it comes to mortgage vs investing.  As mention ~7% grossed up dividends, the capital gains tax argument is also bunk, why would you ever sell shares if you're buying the XJO?
That bit is fine, but you still have a mortgage, which is where a lot of people get confused, Trevie.

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #31 on: March 13, 2016, 05:10:27 AM »
Thanks all. I am definitely going to go a split. At this stage, I am thinking 85% mortgage, 5% reinvested back in to the house for enhancements, 10% outside super investment. The super is mandatory so that isnt all included in this, but is going to be on my calculation spreadsheet.

Thanks, FFA, really helped hearing the "base case" and "bet". I hadn't even thought of the timing or averaging in that way. It added a new perspective and I'm seeing more of the nuances. Still learning.

I'm off to draw my straight lines now!
pleasure. I found this book quite helpful  http://www.wealthfoundations.com.au/understanding-asset-allocation.html   (p.s. not a recommendation for wealth foundations I have never used them)

it talks about lifetime asset allocation and there are some examples of the rateable accumulation concept I talked about.

all the best !


+1 thanks for the arrow! I am doing this now in excel and it is really helping me look at the years!

stashgrower

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Re: Australian Investor - Where do I start?
« Reply #32 on: March 13, 2016, 06:27:50 AM »
Thanks, FFA! That ebook was helpful. Never thought about it like that, with the line and also future  earnings.

KittyZero

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Re: Australian Investor - Where do I start?
« Reply #33 on: March 13, 2016, 07:20:33 AM »
Thanks, FFA! That ebook was helpful. Never thought about it like that, with the line and also future  earnings.

I havent downloaded the ebook yet, I think that will be tomorrow nights reading :)

SS

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Re: Australian Investor - Where do I start?
« Reply #34 on: March 31, 2016, 11:01:52 PM »
Hi all, not sure whether I should be hijacking this post, or starting a new thread.. But I too am a wannabe Aussie investor trying to figure out where to start.

We are 27 & 32, and earn $160,000 combined before tax. We have one investment property worth around $320,000. It's negatively geared (though barely) with $239,000 owing (185K fixed till 2020 + 54K variable). We have no other debt.

I expect to inherit property in 20-25 years so I'd like to diversify by investing in something else and hope to retire as early as possible, with just enough money to last until inheritance. Our spending is quite high as we travel often and are in an expensive rental at the moment, but we are making Mustachian changes slowly. I expect starting a family soon will reduce the amount we are able to invest so I want to get started asap.

With all of your recommendations, the OP has decided to pay their mortgage off first. As ours is negatively geared (and mostly fixed), I'm not sure this is the best route for us. Would you agree we'd be best to start investing with Vanguard instead? As I understand, I could save up lump sums and purchase various Vanguard ETFs through CommSec to mimick a LifeStrategy Retail Fund - paying lower management fees, but incurring $20 brokerage fees with each purchase. Or alternatively, I could buy into a LifeStrategy Retail Fund with Vanguard directly - at a higher management cost, but with the ability to BPAY regularly with no fee.

I'm hoping for some guidance as my parents are fervently pro-property, anti-stock market, and I don't know a single person with a Mustachian mentality!

Thanks in advance :)

potm

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Re: Australian Investor - Where do I start?
« Reply #35 on: April 01, 2016, 12:48:50 AM »
Nothing wrong with your plan SS. Just a couple of points to reduce your costs. CMC markets has cheaper brokerage than commsec at $11 which adds up if you will be buying regularly.
Also with Vanguard funds, if you have a the min amount of $100k to invest, you can enter the wholesale funds which have a lower expense ratio.

Re Trevor, It's nice that someone else here actually gets it. So often the question of whether someone should invest or pay down the mortgage is asked. Even when people suggest a split between the two, when I suggest borrowing against the house to invest instead there is always this fear that borrowing to buy shares is bad. It is just simple tax planning for the same outcome but with less tax paid.

AliEli

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Re: Australian Investor - Where do I start?
« Reply #36 on: April 01, 2016, 06:55:34 AM »
Oh Oh Oh!  Can I join too? :)

I would say that the best thing for OP to do (after paying personal debts, of course) is get the debt on the mortgage below 80% of the value of the property (ie, below $168k based on figures provided).  Interest rates are still quite low, and the more that comes off the mortgage now the more money will be saved in interest when rates inevitably head north again.  This is a fairly achievable goal and could likely be done this year.  Maybe this could be a challenge for the two of you to get stuck in to together, and the focus could help you work out how you plan and manage money together while having a short-term goal.  Whatever your future investment plans, if you intend to borrow money to purchase investments then more equity in your PPOR will help with securing finance.

Additionally, once you have achieved the goal of owning more than 20% of your home, I would suggest investigating salary sacrificing into super - it's a bit of a cash cow at the moment with low tax, and it's likely that won't continue forever, so probably good to get a bit extra in early to give you an extra income stream later in life :)

Leisured

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Re: Australian Investor - Where do I start?
« Reply #37 on: April 03, 2016, 12:25:21 AM »
Steveo has stolen the show on this thread. I support his recommendations, but add that paying off a small mortgage is much better than paying off a large one. I suggest paying the mortgage down to, say, $60K, then slowing paying off the mortgage and increasing payments into super, and paying into index funds. You can 'drip feed' money into an index fund, that is pay money in every month.


Rob_S

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Re: Australian Investor - Where do I start?
« Reply #38 on: April 03, 2016, 04:19:02 AM »
Re Trevor, It's nice that someone else here actually gets it. So often the question of whether someone should invest or pay down the mortgage is asked. Even when people suggest a split between the two, when I suggest borrowing against the house to invest instead there is always this fear that borrowing to buy shares is bad. It is just simple tax planning for the same outcome but with less tax paid.

I am slowly coming around to similar thinking and am considering mortgage debt recycling. Current mortgage is $120,000 but house is worth $380,000. I gross $92,000 and the wife about $30,000. We have been investing in her name for tax reasons.

I'm thinking about splitting $120,000 from the equity in the home. As the non deductible debt is paid down we draw on this additional $120,000 equity; effectively maintaining the same level of debt only changing non deductible debt into deductible debt all while building the portfolio.

Here's where I'm stumped. From a tax deduction point of view it makes sense to invest the equity split in my name but then I pay 39% tax on the dividends. If we invest in my wifes name then we pay less tax on dividends but get less advantage from the tax deductible debt.

What would make sense to do? No split and just invest in wifes name. Split and invest in wifes name. Split and invest in my name?

marty998

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Re: Australian Investor - Where do I start?
« Reply #39 on: April 03, 2016, 03:47:39 PM »
Re Trevor, It's nice that someone else here actually gets it. So often the question of whether someone should invest or pay down the mortgage is asked. Even when people suggest a split between the two, when I suggest borrowing against the house to invest instead there is always this fear that borrowing to buy shares is bad. It is just simple tax planning for the same outcome but with less tax paid.

I am slowly coming around to similar thinking and am considering mortgage debt recycling. Current mortgage is $120,000 but house is worth $380,000. I gross $92,000 and the wife about $30,000. We have been investing in her name for tax reasons.

I'm thinking about splitting $120,000 from the equity in the home. As the non deductible debt is paid down we draw on this additional $120,000 equity; effectively maintaining the same level of debt only changing non deductible debt into deductible debt all while building the portfolio.

Here's where I'm stumped. From a tax deduction point of view it makes sense to invest the equity split in my name but then I pay 39% tax on the dividends. If we invest in my wifes name then we pay less tax on dividends but get less advantage from the tax deductible debt.

What would make sense to do? No split and just invest in wifes name. Split and invest in wifes name. Split and invest in my name?

I think dividends less interest will largely be a wash. Who will wear capital gains is the problem you want to solve.

If the mortgage in both names? How will you split it into one name only?

Rob_S

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Re: Australian Investor - Where do I start?
« Reply #40 on: April 03, 2016, 08:51:15 PM »
Re Trevor, It's nice that someone else here actually gets it. So often the question of whether someone should invest or pay down the mortgage is asked. Even when people suggest a split between the two, when I suggest borrowing against the house to invest instead there is always this fear that borrowing to buy shares is bad. It is just simple tax planning for the same outcome but with less tax paid.

I am slowly coming around to similar thinking and am considering mortgage debt recycling. Current mortgage is $120,000 but house is worth $380,000. I gross $92,000 and the wife about $30,000. We have been investing in her name for tax reasons.

I'm thinking about splitting $120,000 from the equity in the home. As the non deductible debt is paid down we draw on this additional $120,000 equity; effectively maintaining the same level of debt only changing non deductible debt into deductible debt all while building the portfolio.

Here's where I'm stumped. From a tax deduction point of view it makes sense to invest the equity split in my name but then I pay 39% tax on the dividends. If we invest in my wifes name then we pay less tax on dividends but get less advantage from the tax deductible debt.

What would make sense to do? No split and just invest in wifes name. Split and invest in wifes name. Split and invest in my name?

I think dividends less interest will largely be a wash. Who will wear capital gains is the problem you want to solve.

If the mortgage in both names? How will you split it into one name only?

The mortgage is in both names. I found information on this to be thin on the ground but did come across a response from Mr Tax Man
http://www.mrtaxman.com.au/blog/borrowing-to-buy-share
Q: "Can i claim all the interest as a tax deduction on a loan that is used to buy shares if the loan is in 2 names"
A: "If you can demonstrate that you used the funds for shares in your name then you can claim the interest."

Perhaps Mr Tax man is wrong here? Sounds like I'll need to get an official answer from some place other than Google :/
Even if Mr Tax man is right I'm not sure if UBank will go for splitting the loan into one name. Having joint ownership of shares is that little bit of extra hassle that I don't want.

potm

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Re: Australian Investor - Where do I start?
« Reply #41 on: April 04, 2016, 03:05:59 AM »
I haven't looked into the practical side of getting the loan into one name when the house in in both.

I would aim to get the shares in the lower income person's name though. Dividends including franking should generally be higher than the 4-5% interest rates. As time goes on, dividends should hopefully increase so it becomes more and more positively geared.

Primm

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Re: Australian Investor - Where do I start?
« Reply #42 on: April 04, 2016, 03:12:28 AM »
I haven't looked into the practical side of getting the loan into one name when the house in in both.

I would aim to get the shares in the lower income person's name though. Dividends including franking should generally be higher than the 4-5% interest rates. As time goes on, dividends should hopefully increase so it becomes more and more positively geared.

It can be done, but it's slightly complicated. When my ex and I split up he took over the loan and we put it in his name only, but we had to get a legal clause (whose name escapes me) to ensure the bank could sell it without my permission. The reality of that was that if he defaulted on the loan then the bank couldn't get locked into a house they couldn't sell because I was a co-owner without any financial responsibilities.

Thats how I remember it anyway. It was 15 years ago so my memory may be a bit sketchy.

SS

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Re: Australian Investor - Where do I start?
« Reply #43 on: April 04, 2016, 08:40:22 PM »
Nothing wrong with your plan SS. Just a couple of points to reduce your costs. CMC markets has cheaper brokerage than commsec at $11 which adds up if you will be buying regularly.
Also with Vanguard funds, if you have a the min amount of $100k to invest, you can enter the wholesale funds which have a lower expense ratio.


Thanks for the tip potm, that would add up. I looked at the mimicking the LifeStrategy High Growth Fund with ETFs.. Of the 9 different investments, only 5 are available as an ETF. If I were to divide my investments across those 5, I feel like the brokerage fees outweigh the lower management costs if I make a couple of transactions throughout the year. I think I'll start directly with the LifeStrategy High Growth retail fund and once I build up 100K, move it to a wholesale fund.

Does anyone know of any Aussie bloggers invested in an index fund and living off 3% or 4%?

steveo

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Re: Australian Investor - Where do I start?
« Reply #44 on: April 04, 2016, 08:56:49 PM »
Thanks for the tip potm, that would add up. I looked at the mimicking the LifeStrategy High Growth Fund with ETFs.. Of the 9 different investments, only 5 are available as an ETF. If I were to divide my investments across those 5, I feel like the brokerage fees outweigh the lower management costs if I make a couple of transactions throughout the year. I think I'll start directly with the LifeStrategy High Growth retail fund and once I build up 100K, move it to a wholesale fund.

Sounds great.

Does anyone know of any Aussie bloggers invested in an index fund and living off 3% or 4%?

No. I'm sure you could become the first.

SS

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Re: Australian Investor - Where do I start?
« Reply #45 on: April 04, 2016, 09:29:47 PM »
Haha that'd be nice!

FFA

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Re: Australian Investor - Where do I start?
« Reply #46 on: April 05, 2016, 05:49:02 AM »
I don't think I qualify really - infrequent blogger, invested mostly in index funds for my shares, but also much in property. Waited until well below 3% to RE, and already tempted back into part-time work after only 12 months haha !

steveo

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Re: Australian Investor - Where do I start?
« Reply #47 on: April 05, 2016, 06:15:47 AM »
I don't think I qualify really - infrequent blogger, invested mostly in index funds for my shares, but also much in property. Waited until well below 3% to RE, and already tempted back into part-time work after only 12 months haha !

You know what I reckon is a good idea. Give me some of your stash and we can both blog on it at the same time. You can get a higher WR and I can FIRE.

FFA

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Re: Australian Investor - Where do I start?
« Reply #48 on: April 05, 2016, 06:59:11 AM »
nice try steveo , but I have to pass !

I like the way your mind works though, can still recall you doing a survey to collect answers for your work assignment (did I remember correctly ??)

steveo

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Re: Australian Investor - Where do I start?
« Reply #49 on: April 05, 2016, 08:02:45 AM »
nice try steveo , but I have to pass !

I like the way your mind works though, can still recall you doing a survey to collect answers for your work assignment (did I remember correctly ??)

It was worth a shot. Yes I did use this board to do a work assignment. I don't know if running around begging for money would work as good though. I might offend some people.