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?
