Case Study - Im not a Mustachian at all

[Black Dog]

Ok - well Ive been reading for a while, but this is only my second post.
On reading through the forum, Ive come to the realisation, Im not Mustachian at all (though I thought I was doing ok). I have read through "ask a Mustachian" and I gotta say, you guys will be able to help.... I have no doubt.

Heres my situation.

Im an "Australian at heart" though haven't lived or worked there for a number of years. I earn a great salary - which, fortunately includes all my expenses (well, all living costs anyway). I have "tracked" my expenses for the last 12 months and here is my spend report.

Debt repayment - $12,000
Travel - $9500 (holidays)
Spending money $9500 (cash withdrawals from ATM) (I don't know exactly where this goes - I have never tracked it).
Investment property expenses $18,000 (Generates more income than this)
Insurances $4,800
Entertainment $3,000 (eating out, drinks, movies etc)
Bank fees $2600
Groceries $1600
Kids $1500 ($35/month deposit for my niece and nephews)
Clothing $1500
Electronics $850 (kindle, phone, etc)
Taxi $650

Total normal living $64,000
In addition I had other expenses totalling $47,000 which included once off items such as a large legal expense ($5,500), an engagement ring ($6,000), laser eye surgery ($5,500), and a gift to my parents of $30k.

All up I have spent $111,000 in 12months. This leaves me with potential savings/investments of about $110,000/year.

You will note that there are no 'usual' items such as housing (rent), telephone, car etc as these are all provided for me by the company.

Also, a lot of my cash is spent on food/groceries - and my bank fees are high because I travel a lot and get hit with overseas expenses. I have moved to a citibank card which gives me free withdrawals, however I still incur the wrath of exchange rate fees. Noting that cash is my most usual form of spending largely for this reason, and also many of the markets don't accept card payment.

Here I was thinking I was doing ok, spending about $1,000/pm. I just forgot to include all the auto payments coming out of my accounts.

Edit - I have circa $3.4mil in real-estate assets and about $200k cash, with about $2.3mil in debt. The income from assets covers the expenses. I would like to start purchasing some shares/etf to broaden my portfolio. The aim is to be FI in the next 3-4years. However, this will be very hard with my current spending habits.

So Mustachians, hit me with it. What am I doing soooo wrong.

Black Dog

[lifejoy]

The more details, the more people can help you. How much was the legal expense? The engagement ring? Laser eye surgery?

Those bank fees are killin' ya! Why do you travel so much? For work or pleasure? How much in debt are you?

[firewalker]

Yes, more details needed. For example, the spending money. Is that $9,500 from the ATM duplicated in the other categories? If not, can you break down where the $9,500 went? When you say your living costs are covered, what does that include? Is that duplicated by the categories you list? How much do you have at end of month that could be saved?

[Black Dog]

Hi Guys, I have updated the original post.

I don't have any debt which isn't covered by the investment income. I do have about $2,3mil in debt. I don't have any 'personal' debt. I have a credit card which is used occasionally, however, this is repaid at the end of each month. I end up with roughly $110,000 available to invest/save.

The ATM costs are not duplicated. This report came from my bank statements - so it is actual debits from my accounts which I have categorised. I have never tracked the cash spend. I guess most of it would go on food and eating out/drinks.

I travel a lot as I live in a fairly remote area of the CIS (Russia). So I travel for both work, and pleasure. However, the alternative of not traveling is not seeing friends/family in a fairly inhospitable environment.

My work contract includes housing (including all utilities), vehicle, telephone and international airfares. I need to pay for my own food/meals/entertainment.

Black Dog

[SU]

Hi there, sounds like you have an interesting set of circumstances...

In terms of maximising your investments, can you say more about your real estate assets? Are they residential or commercial, and what's your tax status in the country where they are, and is your $2.3m debt mortgage debt, and what is the interest rate on that debt?

One of your first questions (and hey, it's the one I'm working on too) is whether as an expat Australian you are better off paying off a mortgage on an Australian investment property, or keeping the mortgage and directing any additional income to buying shares. For this you need to know the interest rate on your debts (plus tax liabilities) so that you can compare it to the expected return on an ETF. If your $2.3m is mortgage debt, you might be able to negotiate an interest rate that is competitive with stock market returns (you basically want to maximise the spread between (stock market returns - mortgage interest rate) to make investing in the stock market worthwhile).

Another thing to consider is whether the real estate assets are outperforming the stock market - it might be time to sell some even if they are generating income - the income might still be less than what you could get from an ETF.

On the spending side, that's a lot of spending! I get the decompression thing, but you could prepare yourself for a lower cost retirement by doing things like having friends over to watch movies and getting everyone to contribute food and drinks, rather than always going to the theatre etc. It sounds like small beer but you can get big returns from changing habits like that and bringing your friends along with you. Quick path to mustachianism: lose the idea that you need to spend money to have fun.

Are you planning to retire in Australia? Do you have super there? Do you have super?

[Black Dog]

Hi SU
Thanks for the feedback.
Currently all of my debt is mortgage debt against residential investment properties. I have 4 properties in Australia, and 2 in Russia.
Australian properties are currently valued at about $3mil - returning Gross +/-5% ($150k). Mortgage costs on $2mil about +/-5% ($100k). These loans are on Interest Only.
Russia property of about $400k with debt of about $300k. Gross returns and income about 10%. Surplus is used to repay the debt.

Im happy to keep these properties, and diverse into international (US) ETF.

I have basically no Super. Maybe $30k or something, but nothing worth writing about (Ive only left it open as it has a life insurance payout in case I fall off the perch). I don't pay into Super. Im still in my 30s and don't like the way the rules for super keep changing. i would rather have the cash to invest now, and the ability to plan 10years out.
The current plan is to work for about 3-4more years. Then take off around Australia for a couple of years break, while I consider my options.

Black Dog

[AshStash]

Do you travel all over the place, using many different currencies, or to the same countries repeatedly? If there are countries you consistently go back to, can you set up a free checking account in that country? This would let you transfer money cheaply (I use xe.com to transfer between international accounts) to your checking account and take out cash in the local currency, avoiding the ATM fees most banks charge for using foreign ATMs.

Also, I agree you need to start tracking your cash spending so that you know better how to categorize it. Plus the act of tracking it may naturally influence you to spend less :)

[marty998]

All up I have spent $111,000 in 12months. This leaves me with potential savings/investments of about $110,000/year.

So you clear $221,000 cash after tax per year? This is not a normal set of circumstances where the usual advice necessarily applicable. Sure it will still work in a turbo charged way, but you have more choices than the average punter. Being in a "position of strength" as they say.

Figure out what you value most in life and direct your efforts there. You have more than the required means.

[Black Dog]

All up I have spent $111,000 in 12months. This leaves me with potential savings/investments of about $110,000/year.

So you clear $221,000 cash after tax per year? This is not a normal set of circumstances where the usual advice necessarily applicable. Sure it will still work in a turbo charged way, but you have more choices than the average punter. Being in a "position of strength" as they say.

Figure out what you value most in life and direct your efforts there. You have more than the required means.

Hi Marty - yeah, post tax Im clearing about $220k after tax and interest (does change a bit with currency).
This coupled with the fact that I don't (shouldn't) have large living costs which are paid by my company puts me in a great position to really kick some goals in the next few years. However, I can't help but feel if Im spending $100k/year I'm doing something wrong.

I did have a fairly expensive year with nearly $50k of 'one off' expenses but still... $64k is a lot, even for me.

Black Dog

[former player]

Net assets of $1.3M does seem a little low considering your earnings...

I'm wondering how diversified your real estate holdings are.  I get that they are in two different countries, but if they are all high-end city flats/houses you're catering to a single market which is tends to be volatile.

I don't understand what the $12K per month debt repayment is, given that you say you have no personal debt.  Is it linked to your real estate holdings?

Travel seems not unreasonable: I'd do the same if I were working in Siberia.  You do need to keep better track of what happens to your cash withdrawals, and groceries seem high for someone who has their living costs already covered and whose eating out and drinking are counted separately.  Your employers don't provide caviar?

Does the expense for an engagement ring mean marriage is imminent? I assume that if so, there will be significant changes to your lifestyle and budget.

[Black Dog]

Hi Former Player
Thanks
Probably on the oustet my current position is a bit low for my salary - however, I have only been earning this much for 12months. I was previously earning much less (about $100k net).
My real-estate assets are quite varied, and each one is in a different 'market'.
I did a refinance, and when the bank set up a new loan they messed up a bit, and were $12k short, hence the debt repayment. It was on the Australian properties.

I will track my cash spend closely for a few months and see what it produces.

We will be getting married later next year, so yes, I guess the budget will change. Albiet my fiancé earns a lot also, so if anything our surplus cash position will be even higher :O
At least we have the same goal to be FI within the next few years. Earnings are not our issue - we just need to closely control our spending.

Black Dog

[sheepstache]

All up I have spent $111,000 in 12months. This leaves me with potential savings/investments of about $110,000/year.

So you clear $221,000 cash after tax per year? This is not a normal set of circumstances where the usual advice necessarily applicable. Sure it will still work in a turbo charged way, but you have more choices than the average punter. Being in a "position of strength" as they say.

Figure out what you value most in life and direct your efforts there. You have more than the required means.

Hi Marty - yeah, post tax Im clearing about $220k after tax and interest (does change a bit with currency).
This coupled with the fact that I don't (shouldn't) have large living costs which are paid by my company puts me in a great position to really kick some goals in the next few years. However, I can't help but feel if Im spending $100k/year I'm doing something wrong.

I did have a fairly expensive year with nearly $50k of 'one off' expenses but still... $64k is a lot, even for me.

Black Dog

Yeah, the thing is $100,000 is 4% of $2.5 million, so if you don't cut down the spending I don't see how you can retire in 3-4 years.  Especially as the $100k doesn't even include some basic living expenses.

Would you be able to cut down on travel expenses post-FI? 

I'm not clear on how much cashflow you're getting from the real estate, if any, vs. your salary. 

[skunkfunk]

I didn't read the rest of the thread, but you say you read the blog. Do all of that stuff and you can retire RIGHT NOW. Do most of it and you can retire next year or two. Hell, get rid of your one-off expenses and you're almost there. Cut the "cash" (which should go down when you quit your job) and raise the "groceries", consolidate your debts and assets gets rid of debt repayment (one option anyway, otherwise I suggest pay them off ASAP 5% is killing you), travel is OK if you do it a lot on that budget (if that's just one or 2 trips it's horrible), slash entertainment, bank fees go away on their own when you quit, and buy a nice fancy house in a low COL area (this is key) with that 200K, and adding in expenses that the company would no longer cover - you're retired immediately. I calculate expenses of approx. $28200 per year, +/- $5k or so depending on transportation etc. if you do all these things. Easily covered by your net $1,000,000 in investments even if you don't keep all the properties.

Do none of it? Then you're in the wrong place IMO, as the mustachian "cult" is not really conducive to high spending. Financial Independence is merely one goal among several here.

[SU]

Hi there,

I've been thinking lots about your situation and have a couple of questions and a couple of suggestions.

Suggestions:
- with your income, you'd easily qualify for a bank's premier account. Have you tried letting them court you with sweet offers such as low overseas transaction fees and generous exchange rates? Was citibank's the best deal you could get?
- same with airlines and travel - could you leverage all the travel you do into cheaper fares/using lots of FF points for travel, discounts on hotels etc?

Questions:
- have you sought tax advice? Are you a CIS resident for tax purposes, and what's your tax status in the countries where you have real estate? Super rules do change, but there would have to be a big change against you for it to be worth missing out on the option of investing pre-tax. BUT I think you're off the hook re:Australian super if you're not earning in Australia.

- I'm curious about the interest only mortgages. I think lots of Australians (and maybe other people too, but whatevs) get fixated on minimising tax, instead of maximising after tax income/wealth. This leads to people choosing investments with high tax deductions rather than high returns. Your portfolio is highly exposed to interest rate changes - the Government might change the super rules but guess what! the RBA could change the interest rate. If interest rates go up and the property market goes down you're stuck paying a lot of interest on a lot of debt against properties that are no longer worth as much. Then you have no idea how long you'd have to pay out of pocket until the market changes direction again.

A 100% real estate portfolio and interest only loans is very high risk, which might be OK if you are playing a long game but not if you want to retire. 40% real estate or less is more common, so you need to either sell some properties or supercharge your share purchases. You need to supercharge your share purchases either way, but also think about rebalancing away from property.

As for which ETF - which stock exchange are you planning to purchase them through? CIS/Aus/other? You need to know how they will be taxed - and whether you also need to declare income on them in Aus if that's where you're planning to be after you retire. For stuff like this I would start with the advisers at the bank where you decide to become a premier customer - I know at least one Aus bank which has a London based service for people like you, and they work with tax advisers - PM me if you want a recommendation. Just don't let them sell you anything!

I re-read your posts and realise that you were asking about the spending side - the most I can say based on the info you've provided is cut the clothes spending (who cares what you wear in remote Russia?) and halve the travel costs (you can still have a great time with a $5000 travel budget).

Finally, read 'Thinking, Fast and Slow' by Daniel Kahneman. It's a great way to get to know your decision making habits. Especially 'The Illusion of Validity'.

Good luck!

[former player]

Hi Former Player
Thanks
Probably on the oustet my current position is a bit low for my salary - however, I have only been earning this much for 12months. I was previously earning much less (about $100k net).
[...]
Black Dog

The recent big leap in your salary explains a lot in your expenses too, as such a big change takes a bit of adjusting to.  Presumably the properties were your financial strategy before the reality of these big earnings set in.

If I were you, I'd have a strategy of limited expenditure and big savings now to make the most of your earnings while the going is good, with lots of safety and diversification in your investments.  I'd probably want a strategy for getting out of the real estate in either Australia or Russia at some point, as having property on opposite sides of the globe is unlikely to be sustainable/mustachian in the long-term.  I'd be looking to cash out at a time when there is a respectable profit and to reduce the risks in the mean time by putting half my savings to paying down that enormous real estate debt.  I'd put the rest in the index funds in whatever country you think you are most likely to retire to long-term.