Author Topic: Exposing myself for a face punch  (Read 4994 times)

bigchrisb

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Exposing myself for a face punch
« on: January 21, 2013, 09:26:01 PM »
I try to do a bit of an annual strategy review, and figured this year, I'd put my situation up here for your comments - fresh eyes tot he same problems are always good.  I suspect I'm in the upper income bracket compared to many on this board, but the principles remain the same.

About me:
I'm Australian, single and 30. I've been fairly mustachian since 2007, but there is always room for improvement.  I have no dependents and a fairly high risk tolerance.  At the moment, I genuinely enjoy my work, but I'm motivated by the desire to be FI should that change - in other words, I want the FU money, for when the need arises.  Aside from financial goals, I do a lot of scuba diving, and while generally healthy, weight management is a perpetual challenge for me.  My savings rate has varied a bit over the last few years, but has typically been 50% plus, and my net worth has grown from $0 in 2006 to about $900,000 now, comprised of about $500k in savings and $400k in investment returns.

Structure:
While not something often talked about here, I think financial structures are important.  I'm a core shareholder in my workplace, and hold that through a family trust.  I also have an investment company as a beneficiary of the family trust.

Income (monthly, averages, all in Australian dollars, post tax):
Wages: $6950
Dividends from workplace (income to investment company): $4595
Superannuation: $1770
Dividends from listed shares: $2500
Tax return: $1000
Interest: $20
TOTAL: $16835

Expenses:
Business loan $4500 (interest $450 principal $4050)
Margin loan: $3300 (all interest)
Superannuation: $1770
Rent: $165 (I rent a place and sublet to housemates, for close to zero net rent)
Travel: $1500 (High value to me, and an area I would reduce if income dropped)
Utilities: $50
Car: $300
Food/leisure/misc: $1400
Fitness: $230
Dividend reinvestment plans $1200
TOTAL consumption/interest: $7395, TOTAL debt reduction $4050, TOTAL new investment :$2970, free cash flow $2420
Note, some expenses (phone, internet etc) are covered by my work.

Assets:
Private company $590,000
Listed shares $675,000
Superannuation $117,000
Shares in investment company: $68500
First home saver $6700 @ 3.85% (and taxed at 15%)
I'm not allocating a value to my car / personal property / minor cash in transaction accounts etc.

Liabilities:
Business loan: $84,000 @6.88% variable.  Interest tax deductible, current payments will pay off in 18 months.
Margin loan: $300,000 fixed @8.45% until June.
Margin loan: $164,000 @8.34% variable.

Net worth ~$900,000.

Current strategy:
- All the dividends from my workplace are used to buy stocks in the investment company.  This keeps the income taxed at 30% rather than 38.5%.  I'm trying to build up this investment company to spin off sufficient income for a modest lifestyle (say $30k/year).  This means that at the end of each year, this company needs to have about $55k more stock in it.  (to date, when needed, I've been selling stock in my own name and repurchasing in the company name, so no net new stock purchased).  If I don't do that, I'll have to pay another $6700 in income tax.
- I send the maximum concessional amount to super to take advantage of the 15% tax rate. I'm hesitant about putting after tax money here, as I don't trust that the rules will be the same in the 30+ years when I will be able to access it.
- Even though its not the highest interest rate, I'm keen to get the business loan paid off.  Its on track for August 2014.
- I'm adding the maximum allowed to the first home saver accounts ($6000/year) for the bonus 17% govt payment, and to have some cash earning interest taxed at 15%.  Buying a house is something I see as a medium term goal.
- I've used DRPs for those stocks that have them, mainly because it provides a lazy way to get some compounding. I'm intending to keep this up.
- Typically, I've been putting any share cash flow into reducing the margin loan (at least on paper).  Reviewing my records show that in practice, while I've bought more stock, my total debt hasn't changed. A picture says a thousand words on this:


Goals for this year:
- Expenditure wise, I want to toughen up on the food/leisure/misc categy.  For starters, I need a better understanding of what's actually in here. I'd like to liberate an extra $400/month.
- Obviously, the interest rates on my margin loan are a killer.  I'm a bit stuck with it until the fixed term expires (I'd still pay the interest even if I canned it), but I'm thinking about refinancing this with another lender.  My shopping around suggests that 6.90% is likely (i.e. $500+/month of interest to be saved.  To do this, I need to reduce the outstanding loan a bit though, as the alternate lenders offer lower LVRs.  Dropping the margin loan altogether (from selling stock) is something I've considered, but I think the total stock return is still higher than the margin interest rate (and I'd loose about $14k in capital gains tax)
- Channel my spare cash flow into paying down the margin loan ($2420 + $400 + $500 (interest saving from July onward) = $36840 by end of year.  Take out the $6k in June for the FHSA payment.
- Convert my industry super fund into a self managed super fund.

Apologies about the essay, but I figure this gives you a reasonable picture of where I am at. So, now that tangled web of finances is on the table, what would my fellow mustachaians do?


 

Nudelkopf

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Re: Exposing myself for a face punch
« Reply #1 on: January 22, 2013, 01:13:14 AM »
Food/leisure/misc: $1400

Goals for this year:
- Expenditure wise, I want to toughen up on the food/leisure/misc categy.  For starters, I need a better understanding of what's actually in here. I'd like to liberate an extra $400/month.
Good goal! (This is my entire monthly spending, in your one category!) I'm Australian as well, and so I know groceries are more expensive here than in America, but I average $50/week groceries. So, that leaves you with $1350 of leisure/misc :P

marty998

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Re: Exposing myself for a face punch
« Reply #2 on: January 22, 2013, 01:40:26 AM »
Have you got a valuation done on the business? Could be lower, could be higher than $590k. If higher you could already have your FU money and if you could achieve a good sale price.

How much have you thought about where you would consider buying your PPOR? Remember it could potentially be a very good CGT free investment. Why wait for the medium term?

Ozstache

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Re: Exposing myself for a face punch
« Reply #3 on: January 22, 2013, 02:40:53 AM »
I'm having trouble interpreting which expenses are weekly, monthly or annual. What exactly are your annual living expenses, sans investment and business expenses?

happy

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Re: Exposing myself for a face punch
« Reply #4 on: January 22, 2013, 02:49:21 AM »
I'm not even going to try to give you any financial critique... way beyond my knowledge! Just two comments one micro and one macro

1. $1400 food/leisure/misc/ month = $16800/year....this is a big sum to be so vaguely described. If you aren't tracking this and don't really know whats in there this would be a good place to start, if you trying to reduce expenditure a la MMM...there probably a few grand in there that could go.

2. Now the macro. Your net worth growth in 6 years is stunning, well done. But to do this you've taken a fair bit of risk....margin loans and margin calls are not for the faint hearted.  You have a big stache: 900k = 36k at 4%SWR or 27k at 3% SWR.  Do you have a "number"? I see you are after FU money/Fi, not actual retirement at this point. Looking at the big picture, I think its time to start consolidating your stache and reducing your risk ie your risky debt. I'm sure you already know about selling shares that are not performing well so as to reduce CGT. (maybe you don't have any!). I'm not saying do it all in one go, but start to think (or get advice about) about the most cost effective way to reduce the debt. No point really in going over the concessional rate for super..you will get taxed at your marginal rate.  And secondly consider diversifying to reduce risk. Inevitably I guess this means real estate...buying a primary residence is only helpful if you believe you are going to get capital gains -  and in your case  the council rates alone will equal your current rent! In your situation buying a PPOR is a more a matter of quality of life....if you are happy with your current rental situation, why change? It will cost you more.  So do some research and gather your thoughts about what sort of diversification you feel good about. Unless you are harbouring secret desires to be filthy rich ( in which case, this is not the forum to ask these questions to), I personally think its time to start thinking about margins and levels of safety http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/.

bigchrisb

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Re: Exposing myself for a face punch
« Reply #5 on: January 22, 2013, 03:20:20 AM »
Thanks for the responses. 

Nudelkopf:
Of the misc/leisure/groceries, only about 400 is groceries ($100/week),  so the groceries are reasonably dialed down.  I suspect some of it is eating/entertaining/drinks.  Problem is that I track my budget based on all my electronic transactions, and I usually get cash out when getting groceries - its where the cash goes then that is the problem!  Maybe I need to keep a cash diary.

Marty:
Re the business valuation, the last offer for purchase we had was higher than my carrying value.  However, at the moment I'm not sure what I would do instead.  I'm happy to leave it be until that changes, rather than expend too much energy on hypothetical valuations (and all valuations are hypothetical, until you see the dollars!)

The PPOR question is a good one, and one I have given a bit of thought to lately.  I guess I've been holding off for now, as:
- Personally, I feel that the Australian house market is overvalued, and am reluctant to buy in at the moment
- I'm already in over half a million of debt.  I'm reluctant (and to be honest, probably don't have the liquidity) to take on more debt at the moment.  Once I get the business loan paid off, this may change.
- I'm yet to figure out what type of house I really want to live in
- My opportunity cost is low (my effective rent at the moment is about $40/week).

That said, the tax breaks for a PPOR are pretty attractive - no tax on imputed rent, GCT free on sale.

Ozstache: All numbers are monthly.  Annual post tax income $202k.  Annual expenses:
Rent: $1,980
Utilities: $600
Car: $3,600
Fitness: $2,760
Food/leisure/misc: $16,800
Total non-travel: $25,740/year
Travel: $18,000/year
TOTAL = $43,740, 21.6% of income

Happy:
Agree on the category to investigate.
Regarding the transition to safety, that's kind of why I've been slowly transferring shares into the investment company.  Separate entity, somewhat protected, and no leverage.  The idea in my head is for this to be the preserved capital base for young man money, and super be the preserved capital base for old man money.  The high risk (investment and business wise) in my own name is on paper, where the wealth gets generated.

Loosing stocks? Nope don't have any of them (anymore). But I do have close to $40,000 in carried forward capital losses - I've already harvested what's available here unfortunately. Its actually one of the nice things about the investment company stucture - selling shares with a capital loss in my name, and buying them in a different legal entity achieves the same asset exposure, while (at least as far as my accountant has advised) working around the "wash sale" rules of the ATO. 

One of my biggest concerns about diversification is about too much exposure to the two trick pony Australian economy (resources and property/associated financial stocks).  As such I try to keep some of my assets in international, un-hedged shares - both to try to get exposure to other sectors, and to get exposure to other currencies.
 

happy

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Re: Exposing myself for a face punch
« Reply #6 on: January 22, 2013, 04:09:50 AM »
Quote
Of the misc/leisure/groceries, only about 400 is groceries ($100/week),  so the groceries are reasonably dialed down.  I suspect some of it is eating/entertaining/drinks.  Problem is that I track my budget based on all my electronic transactions, and I usually get cash out when getting groceries - its where the cash goes then that is the problem!  Maybe I need to keep a cash diary.]Of the misc/leisure/groceries, only about 400 is groceries ($100/week),  so the groceries are reasonably dialed down.  I suspect some of it is eating/entertaining/drinks.  Problem is that I track my budget based on all my electronic transactions, and I usually get cash out when getting groceries - its where the cash goes then that is the problem!  Maybe I need to keep a cash diary

Maybe just think about using a more easily trackable spending habit. eg  I take a fixed amount  of cash out each week for food/groceries and petrol and $15 misc for those little things that pop up when you have kids ("mum I need a new gluestick/ exercise book etc"). I pay for those items only with the cash. If there is any left over I keep it as "excess" for those weeks I find an item I want to stockpile etc.  So I don't track exactly what I spend on these items each week, just know  overall what it comes out to on average. Everything else I either use  credit card or eftpos from my cheque account.

Once you figure out where its going maybe you can set up some "rules "on how you pay certain items so you can track them.

Edit for typos
« Last Edit: January 22, 2013, 04:26:32 AM by happy »

Ozstache

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Re: Exposing myself for a face punch
« Reply #7 on: January 22, 2013, 04:20:31 AM »
Ozstache: All numbers are monthly.  Annual post tax income $202k.  Annual expenses:
Rent: $1,980
Utilities: $600
Car: $3,600
Fitness: $2,760
Food/leisure/misc: $16,800
Total non-travel: $25,740/year
Travel: $18,000/year
TOTAL = $43,740, 21.6% of income

Thanks. Your rent was throwing me because it was reading like a weekly amount.

You're lucky your paying so little for your accommodation in this fine land of ours, because normal rent or a mortgage on one of our ridiculously overpriced houses could easily add another $20-30K to that figure.

I'm in the fortunate position of having all but paid out my ridiculous mortgage on a nice 10 year old 4 bedder here in Canberra, and I'm still getting a subsidy from my employer that covers all running costs (rates, maint, insurance), hence my accommodation is essentially cost free to me. I do hope for the rest of Australia's sake that our house prices come down from the stratosphere such that we all don't have to put down such a large chunk of our stash just to get a roof over our heads!
« Last Edit: January 22, 2013, 04:22:06 AM by Ozstache »

bigchrisb

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Re: Exposing myself for a face punch
« Reply #8 on: January 22, 2013, 04:28:17 AM »
Yes, the rent is very low.  My actual rent is a fair bit higher, but I sublet two rooms in the house to housemates, recovering most of the rent costs.  Family own the house, so I'm able to treat it pretty much as my own.  Then again, when something goes wrong, I'm the one to get it fixed, with any invoice passed on to them.  I've lived alone before, and got bored/lonely, so actually prefer having housemates around.

I'm reluctant to buy with my current arrangement, as I'm also in Canberra, and the fixed costs (let alone the transaction costs) would be greater than my current net cost of housing.